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THE PRACTICAL WORK 
OF A RANK 



A TREATISE ON PRACTICAL BANKING WHICH AIMS TO 

SHOW THE FUNDAMENTAL PRINCIPLES OF MONEY; 

THE PRACTICAL WORK OF A BANK IN DETAIL, AND 

PARTICULARLY, CREDIT IN ITS RELATION 

TO BANKING OPERATIONS 



By WILLIAM H. KNIFFIN, Jr. 

Vice-President, First National Bank, Jamaica, New York City, Author of " The Savings 

Bank and Its Practical Work,'" "New York Savings Bank Cases," 

"Commercial Paper and The Analysis of Credit 

Statements," etc. 



SECOND EDITION 
REVISED 



NEW YORK 

THE BANKERS PUBLISHING COMPANY 

1916 



ifcfc* 






Copyright 1915 

The Bankers Publishing Company 

New York 



Copyright 1916 

The Bankers Publishing Company 

New York 



v t 



OCT -6 1916 



'CI.A438736 



TO MY FRIEND 

VICTOR A. LERSNER 

IN E APPRECIATION OF A LONG AND 
HELPFUL FRIENDSHIP 



ACKNOWLEDGMENT 

In the preparation of this work the author has had material assist- 
ance from many friends who have, by helpful criticism, improved the 
original plan and manuscript to such an extent that proper acknowledg- 
ment is due the following: 

Victor A. Lersner, Comptroller Williamsburgh Savings Bank, Brook- 
lyn, and Elmer H. Youngman, Editor Bankers Magazine, for reading 
proofs of the entire work; Henry Billman, Cashier North Side Bank of 
Brooklyn, for criticism of the chapters on "Receiving and Paying 
Tellers"; William H. Milliken and William M. Rosendale of the Market 
and Fulton National Bank, New York, for reviewing the chapter on 
"Lending the Bank's Money"; N. D. Ailing, Assistant Cashier Irving 
National Bank, for reading the chapter on "Clearing-Houses"; George 
M. Stoll and William M. Hyne of the Equitable Trust Company for sug- 
gestions in the chapters on "Collections and the Messenger" and 
"Checks and Their Collection," respectively; E. G. McWilliam, Pub- 
licity Manager of the Security Trust and Savings Bank, Los Angeles, 
for criticism of the chapter on "The Bank as an Accounting Machine"; 
Marian R. Glenn, Librarian of the American Bankers Association, chap- 
ter on "Bank Examinations and Audits"; E. H. Ensell of the National 
City Bank, for valuable work on the chapter on "Cost Accounting and 
Analysis of Accounts"; and Grace M. Bavier of the New Rochelle Pub- 
lic Library, for many valuable grammatical suggestions throughout the 
text. 

Credit is especially due to the officers of the Guaranty Trust Com- 
pany and the Irving National Bank, who placed the entire set of forms 
used in their institutions at the disposal of the author, and from which 
selections, as the cuts will indicate, have been made; and to Dennison 
& Sons, New York, for use of their stock forms. 

Also to those mentioned in the text, and others, particularly the men 
of the American Institute of Banking, from whom by personal contact, 
lectures and published addresses much of the practical in this work has 
been gleaned. 



PREFACE 

The methods and machinery of practical banking do not materially 
change with the passing of the years. The changes that take place from 
time to time are mechanical rather than fundamental. The one drastic 
innovation of the past decade has been the introduction of the Numerical 
Transit System, which substitutes numbers for names — an obvious con- 
servator of time. 

While the technique of banking has not undergone any decided de- 
parture from established principles, the machinery of banking has, how- 
ever, gone through a process of evolution, as the increasing demands of 
the business world have made shorter and quicker methods necessary in 
order to cope with the added volume of work without unduly increasing 
the cost. The adding machine and the adding typewriter, particularly, 
have come into play as time and labor savers of the highest usefulness, 
without which the labor cost of banking would be much greater than 
the profits would warrant. 

Nevertheless, there would seem to be room for a new work on 
practical banking, dealing with the subject in a form different from 
any which have heretofore appeared; and this work is in no way intend- 
ed to supplant, but rather to supplement, those which have gone before, 
whose excellence will for many years be recognized. 

It has been the author's aim to collate the best thought of the past 
ten years relative to the practical conduct of a bank, particularly from 
men who have written and spoken concerning the work in which they 
have had long experience. Especially is this true of the men of the 
American Institute of Banking, from whom much help has been re- 
ceived, and which is here gratefully acknowledged. 

It is difficult, if not impossible, in a work of this kind, to avoid ap- 
parent repetition, as the work is viewed from different angles; for the 
work so dovetails that in describing one process, or the work of one de- 
partment, other processes and departments must of necessity be men- 
tioned, but such duplication has been avoided as much as possible. 

Owing to the formative state of the Federal Reserve System it has 
been thought best to omit detailed account of its operations, covering the 
same only in general principles with an appendix giving recent rulings 
affecting commercial paper and time deposits. 

It is hoped the work will prove constructive in its development, con- 
cise and correct in its statements, and readable withal. Each chapter 
has been passed upon by those in position to criticise intelligently, and 
many helpful suggestions have been received from various sources, due 
acknowledgment of which appears on the preceding page. 

W. H. K., Jr. 
New York, August, 1915. 



PREFACE TO SECOND EDITION 

In reviewing this work for its second edition, but few changes have 
been found necessary, except in the footnotes, it having been the author's 
aim to so prepare the text that it would not soon become obsolete. 

Addenda have been added to Chapter V under the head "Legal Ten- 
der" ; Chapter VI has been slightly changed in the text treating the lia- 
bility of a bank for forged and altered instruments ; Chapter X contains 
an important addition under the subject "KeejDing the Bank's Books by 
Machinery," which, owing to the relatively recent perfection of this 
method of bank accounting has been given extended consideration. A 
few illustrations have also been changed, but otherwise the work is essen- 
tially as it first appeared. 

The author here wishes to acknowledge the many favorable comments 
received from the press and the banking fraternity, and the hearty recep- 
tion accorded the work, which has been sufficient to exhaust the first 
edition within a year. 

W. H. K., Jr. 

New York, August, 1916. 



■vni 



CONTENTS 

PAOB 

CHAPTER I. THE THING WE CALL MONEY 1 

Exchange; barter; trade; demand and supply; a common denominator 
of values; what is money; characteristics of money; paper money; the evo- 
lution of a bank. 

CHAPTER II. THE BANK AS A CREDIT MACHINE 12 

Metallic money; trust the basis of the credit system; manufacturing 
credit; operating a credit machine; forms of bank credit; bank-note credit; 
certification credit; acceptance credit; the limits of bank credit; clearing of 
bank credits; international clearings. 

CHAPTER III. BANKS, BANKERS AND BANKING 27 

Banking machinery necessary; the private banker; banks distinguished; 
banks defined and classified; the functions of a bank — deposit, discount, 
note issue. 

CHAPTER IV. THE ORGANIZATION AND ADMINIS- 
TRATION OF A BANK 38 

The men behind the bank; surplusage of banks; the charter; directors; 
the "one-man bank"; the president; vice-president; cashier; "ink-spots on 
the ledger"; the banking house; the banking room; "Philip — an Institution." 

CHAPTER V. DEPOSITS AND THE RECEIVING 
TELLER 68 

New York the deposit center; competition for bank deposits keen; 
opening an account; the bank and its depositors; the pass-book; the re- 
ceiving teller; duties and qualifications of the receiving teller; good money 
and bad; making a deposit; checks for deposit; endorsements; corporation 
checks; third party endorsements; the deposit ticket; right name should 
be on the ticket; the depositor should make the ticket; proving the ticket; 
the machinery of banking; the teller's records and proofs; the block sys- 
tem; a day with the receiving teller; legal tender. 

CHAPTER VI. THE PAYING TELLER, HIS PAYMENTS 
AND HIS CASH 88 

Receiving vs. paying teller; qualifications and essentials of the paying 
teller; the paying teller's duties and responsibilities; the teller's cash; cash- 
ing a check; words and figures on checks; identification; crossed checks; 
stop payments; the clearings; bearer checks; certification of checks; pro- 
tection of bank checks; ease of obtaining checks for raising; cashing a 
stop payment check; how to stamp checks; sample checks — care of; how 
safeguarded; how to protect against check frauds; educating depositors; 
payrolls; the teller's mistakes; the money teller; figuring the reserve; the 
unit system; proverbs of a paying teller; the acid test for coins; liability 
on forged and altered checks. 

CHAPTER VII. CLEARINGS AND CLEARING-HOUSES. . 145 

Origin of clearing-houses; the largest check ever paid; varieties of 
clearing-houses; clearing-house terms and instruments; getting ready for 
the clearing; the clearing process; settling the balances; clearing-house set- 
tlements; clearing-house activities; clearing for non-members; clearing 
country checks; the weekly report. 

CHAPTER VIII. COLLECTIONS AND THE MESSENGER. 164 

The messenger; the messenger's valuables; old employees; meeting 
men; the law of collections; collecting direct from payee banks; endorse- 
ments; the machinery of collections; the note teller; out-of-town collec- 
tions; coupons; savings bank books. 



PAGE 

CHAPTER IX. LENDING THE BANKS MONEY 205 

Loans and discounts distinguished; loans and credit; deposits often 
loans; liquid loans; applying for a loan; collateral loans; listed and un- 
listed securities ; the margin ; watching the ticker ; "good delivery" ; form 
.::w„> of collateral note; time loans; bookkeeping of the loan; loan register; ma- 
« turity record; the borrower's liability; substitutions; when the due date 

arrives; unearned discount; accounts receivable as collateral; interest; 
payment of call loans; loans for the bank's correspondents; warehouse 
loans; bills of lading. 

CHAPTER X. THE BANK AS AN ACCOUNTING 
MACHINE 249 

Presentation of accounting facts; the accounts of a bank; banks agree 
in essentials; corporate records; stock certificate book; stock subscrip- 
tions; transfer of stock; dividends; the books of record; the journal; the 
equation of accountancy; the statement of condition and its analysis; 
assets; liabilities.; the bookkeeping force; the application for employment; 
available men; the new recruit; the art of handling men; the chief clerk; 
days off; employees' pensions; purpose of the records; controlling accounts; 
the general ledger; the accounts with depositors; the Boston Ledger; the 
average book; accounts stated; the statement system; opening a new ledg- 
er; balancing pass-books; stationery and supplies; expenses; petty cash; 
changes in accounts; care of tickets and vouchers; keeping the bank's books 
by machinery; bank statements by machinery. 

CHAPTER XI. CHECKS AND THEIR COLLECTION.... 319 

Checks circulating currency; growth of the use of bank checks; defects 
in the present system of finance; checks denned; checks classified; com- 
pensating balances; the country banker and his city correspondent; the jour- 
ney of a bank check; the transit department; collection of bank checks; 
exchange charges; the numerical transit system; the operation of the tran- 
sit department. 

CHAPTER XII. BANK EXAMINATIONS AND AUDITS 349 

The rignt to examine, police power; classes of bank examinations; ex- 
aminations by directors; what the examiner should know; the psychology 
of errors; how to make an examination; cash and exchanges, verification 
of; collateral loans; unsecured loans; government moneys and securities; 
amounts due from banks; verifying the liabilities; clearing-house examina- 
tions ; benefits of clearing-house examinations ; little points for the exam- 
iner; various matters concerning which the Comptroller requires detailed 
information. 

CHAPTER XIII. ESSENTIALS IN GRANTING CREDIT. . 371 

The nature and functions of credit; credit in economics; credit in 
law; credit in business; the field of credit broad; credit a science; credit 
is old; credit a fine piece of mechanism; credit a transfer; credit a law- 
ful right; credit is capital; credit an asset; credit is reputation; credit is 
willingness; credit is ability; credit is resources; credit is confidence; the 
psychology of credit; mental processes; all men not honest; two men bet- 
ter than one; past performances; property and property rights; collateral 
loans not essentially credit transactions. 

Personal Credit — Personal credit distinguished ; the granting of per- 
sonal credit; references; personal credit ratings; individual vs. mercantile 
credit; the charge account; the growth of personal credit; period of per- 
sonal credit; losses in personal credit; personal credit ihe foundation of 
the credit system. 

Mercantile Credit — Benefits of mercantile credit; bank credit rests 
upon mercantile credit; bank credit should facilitate exchanges; channels 
of commercial credit; buying and selling without cash; changing conditions 
in mercantile credit; mercantile credit terms; instruments in mercantile 
credit; books accounts as security; assigned accounts a menace; dating 
ahead; the mercantile credit field; enormous cost of retail selling; frauds 
in mercantile credit; the mercantile statement; how to figure the turnover; 



PAGE 

granting mercantile credit; why men fail; development of the retail store; 
profits; losses; business risks; the wholesaler and the retailer; standards 
of credit; the credit department; the bank and its correspondents; credit 
information; how credit information is kept; classification of risks; the 
credit man; losses expected; the essentials of a good loan; elements of 
sound credit; the man — the moral risk; his methods — the business risk; his 
resources — the property risk; the statement — the borrower's estimate of 
himself; standardized forms of credit statements; the statement must be 
recent; false statements; statement reciprocal in value. 

Analyzing a Statement of Condition — Two to one; cash; bills re- 
ceivable; accounts receivable; merchandise; inventory; trust receipts; cap- 
ital assets; machinery and fixtures; liabilities; accounts payable; ratio of 
plant to capital; net worth; depreciation; bank connections; liabilities to 
capital; accrued assets and liabilities; good will; integrity of organization. 

The Passing of a Loan — Comment by the credit man; what the credit 
man wants to know; commercial paper; commercial paper, liquid re- 
serves; the cash discount system; what it costs the retailer not to take his 
discounts; commercial paper and the Federal Reserve Banks; two-name 
paper; the discount market; the commercial paper broker; buying paper on 
option; answering credit inquiries; deductions of a credit man in analyzing 
business statements; qualities of a credit man; the credit man's tools; the 
deductive process; the three C's of credit; essentials in a credit statement; 
four actual statements analyzed and commented upon. 

CHAPTER XIV. THE BANK MAN IN THE MAKING 503 

The banker in fiction; the bank man's wage; two schools of banking; 
the country bank and the city bank; proper training essential to success; 
pivotal points in a bank man's life; learning by doing; every man can bet- 
ter himself; a definite aim; taking himself for granted; definite methods; 
what is education?; experience a dear teacher; education a definite process; 
more bread and butter; the bank man's twenty-four hours; things the bank- 
er must know. 

CHAPTER XV. THE MORNING-MAIL 518 

Handling the mail in a large city bank; outgoing mail; improved 
method of folding letters; record of stamps used; filing correspondence; a 
practical filing system. 

CHAPTER XVI. COST ACCOUNTING AND ANALYSIS 
OF ACCOUNTS 537 

Bank profits; profitable and unprofitable accounts; the bank's services 
to the depositor; the quality of the account — its influence; penalizing small 
balances; cost accounting in banking; administrative costs; exchange 
charges — interest; the earning power of money; special costs; three theories 
of apportionment; units of cost; a cost system based upon expenses; 
analyzing the expense account ; cost of handling an item. 

CHAPTER XVII. FOREIGN AND DOMESTIC EXCHANGE. 569 

Settling debts without money; origin of foreign debts; the demand 
for foreign bills; forms of bills of exchange; how exchange is quoted; the 
basis of exchange; causes that effect exchange rates; imports; exports; 
profits in foreign exchange; cables; domestic exchange. 

APPENDIX 591 

Rules and regulations issued by the Federal Reserve Board, relative 
to commercial paper; credit information; acceptances; time and savings 
deposits; national banks as trustees, etc.; loans on farm lands, etc., etc. 

INDEX 635 



CHAPTER I. 

THE THING WE CALL MONEY 

At the very beginning of the economic process each man 
got from nature the things he needed to satisfy his wants, 
which were simple. But men soon found that to work to- 
gether was more satisfactory than to work alone, and that 
they could profit by exchanging the things they produced for 
things produced by others. A man might have a surplus of 
one thing and his neighbor a dearth of another, and they 
could exchange to their mutual advantage. Individualistic 
life as led by Robinson Crusoe is possible only in story books. 
And as men produced and exchanged they learned to trust 
each other — not in the sense of extending credit, but as to 
fair dealing. The exchange of commodities for commodities 
is the basis of all the world's industry. Trade is merely the 
exchange of one article for another. Trade is barter and 
barter is trade. 1 

Debts Settled by Exchanging Commodities 

Communities differ and nature's products are not evenly 
distributed. One community can best produce one thing; 
another, another. One community can produce wheat and 
the other grind it into flour. Where wheat is in abundance, 
water power may be scarce. And as one section produces 
one thing and another produces another, community debts 
are settled by an exchange of goods for goods, the same as 
between individuals. Thus, New England buys wheat from 
Dakota and gives shoes. For our cotton England gives us 
manufactured goods. For the debts we owe her for ship- 
ping, freights, insurance and interest on our debt to her, we 
send, not gold, but wheat and cotton. We pay, as a rule, 
not in money, but in goods. The trouble in the early days 
of the present war was we could not get our goods over to 

lit must be borne in mind, however, that all trade is barter, even when 
the precious metals are employed as intermediaries — the latter being articles of 
barter also, and possessing the same value as the things for which they are 
exchanged. The whole science of money hinges on this fact. White, Money and 
Banking, p. 10. 

l 



2 THE PRACTICAL WORK OF A BANK 

settle our European debts, and it looked as if we would be 
obliged to pay in gold. 

Demand and Supply 

The amount of product one man will give for a certain 
amount of another depends upon the amount he has at hand, 
the labor involved in producing, 2 and other factors entering 
into the scheme of production. That which is scarce will 
have a higher exchange value than that which is plentiful. 
This condition tends to correct itself by labor going into 
those channels where scarcity exists, and producing enough 
to effect an equilibrium. Thus, if cattle are scarce and meat 
high, unless by some operation such as a meat trust, whereby 
prices can be maintained by artificial means (although not 
for long) men will engage in raising meat animals until 
the supply balances the demand and prices fall. Only as the 
consumptive power of the people increases faster than the 
productive power can high prices in food products long exist. 

As civilization has developed, men's wants have become 
more complex, so that as wants have increased, ways and 
means have been found to satisfy them; and little by little 
through the centuries we have built up the present world 
structure of commerce and industry, the ultimate end and 
aim of which is to satisfy the three fundamental wants of 
the human race — food, clothing and shelter — with all the 
ramifications that result from the satisfaction and gratifica- 
tion of the five senses. 

And as time went on, increased facilities for the produc- 
tion of goods have been devised, labor has been divided and 
sub-divided, each doing best that for which he is most fit by 
training, education and temperament, so that out of it all 
has arisen what we call "exchange," meaning the giving of 
one thing for another, whether it be money or goods or 
services, or a combination of these elements. 

E ably Recollections 

Very early in life we came to realize that there was a differ- 
ence between the things which belonged to us and the things 

2Money is always the product of labor. Nobody could give that which 
has cost him labor in exchange for something which he could obtain without 
labor. White, p. 9. 



THE THING WE CALL MONEY 8 

which belonged to others. We were jealous of our toys. We 
were impressed with the idea that over the things which were 
ours we were allowed to exercise dominion; we had special 
rights. We were early taught to respect the rights of 
others. We learned that the things that were displayed in 
the candy store were not ours and could not be had for ask- 
ing, but could only be obtained by giving something in 
exchange. Just what the penny we had to spend was in the 
economic scheme — what the storekeeper did with it — we did 
not know or care. And whether we were receiving value in 
return, we did not have much thought; but we did have con- 
cern that we should exchange the penny for something that 
appealed to us. 

The first thing we learned, therefore, before acquiring 
possession of the property of others was that permission of 
the owner must be obtained, or something given in exchange. 
If the permission was without an exchange it became a gift 
and not an exchange. We might, however, get possession 
by promising to give something, sometime, and thereby ob- 
tain the article on a deferred payment, and thus obtain it on 
credit. We have, therefore, unconsciously as children used 
the two fundamentals of banking — monev and credit. 



A Common Denominator of Values 

Before any exchange of goods can be made, not only 
must consent be given by both parties, but there must be an 
agreement as to what shall constitute the basis of the trade 
— what shall measure the value. The consent must be to the 
same thing. It matters not, so far as the fairness goes, if 
each were to agree that thirty inches were a yard, neither 
would be the loser, for in fixing the value this would be 
considered. 

As labor became divided — each man to his trade and all 
trading together, exchanging goods for goods — it was found 
that a common denominator of values was necessary. It 
was needfut that the man who made a pair of shoes should 
have something by which to measure the labor and material 
involved therein, so that he might exchange his labor as rep- 



4, THE PRACTICAL WORK OF A BANK 

resented thereby for other things. The shoes must represent 
so many units 3 

We did not progress very far in life before we discovered 
that there was a common thing that would be accepted by 
all men as the basis of all exchanges and for all things, 
namely, money. It might be in the form of paper, or it 
might be metallic money, but it was money. And we fur- 
ther learned that if we did not want to exchange the money 
we had at the time for some other article, we could keep it 
and use it at a future time, and it would be as good then as 
at first; and thus money came to have power in reserve — 
stored energy — as well as exchange power. We could save 
it as well as trade with it. Moreover, we could put it in a 
bank and get a pass-book or a certificate of deposit for it, 
and when we wanted it the banker would give us, not the 
identical money we left with him, but its equivalent, and 
thus we discovered that money would not only exchange for 
goods and keep its power to exchange for goods, but could 
be exchanged for a credit. And it may be we found that if 
we left it for a length of time, the banker would 
give us a little more than we deposited, and money 
came to have an earning power; that is, the banker paid us 
for the privilege of using our money for a time to loan to 
other men who wanted to use it and would pay for its use, 
and thus we became acquainted with the principle, if not 
the theory, of interest and the uses of money. 

A Medium of Exchange 

It was not long after men began trading that they real- 
sit is plain that in the first society (that is, in the household) there was 
no such thing as barter, but that it took place when the community became en- 
larged; for the former had all things in common, while the latter, being sepa- 
rated, must exchange with each other according to their needs, just as many 
barbarous tribes now subsist by barter; for these merely exchange one useful 
thing for another. This kind of trading is not contrary to nature, nor does it 
resemble gainful occupation, being merely the complement of one's natural in- 
dependence. From this, nevertheless, it came about logically, that as the machin- 
ery for bringing in what was wanted, and sending out the surplus, was incon- 
venient, the use of money was devised as a matter of necessity, for not all 
necessities of life are easy of carriage. Therefore, to effect their exchanges men 
contrived something to give and take among themselves, which, being valuable 
in itself, had an advantage of being easily passed from hand to hand for the 
needs of life — such as iron or silver or something else of that kind, of which 
they first determined merely the size and weight, but eventually put a stamp on 
it in order to save the trouble of weighing, for the stamp was placed there as 
a sign of its value. Aristotle, Politics, p. 9. 



THE THING WE CALL MONEY 5 

ized that barter would not answer. They needed a common 
medium of exchange 4 and a common denominator of prices. 
And by common consent this medium of exchange is called 
money. "When I save enough money, I am going into 
business," says the clerk; meaning that when he gets enough 
of one thing to exchange for other things, he will give the 
other things in exchange for the thing he first had and, 
therefore, do business as a trader, using money as a medium 
of exchange and a basis for the exchange values. He buys 
new goods only when he has the money in hand or in pros- 
pect to exchange for them. The contractor on the sewer 
system will exchange his money, saved it may be by work- 
ing on a sewer job himself, for the labor of the men in the 
trench, who w T ill exchange that money for things to eat ; and 
the merchant will exchange the money for more goods to 
exchange again for money. 

The merchant looks in his till and finds it empty. "I 
must collect some money," says he; meaning that he must 
turn his book accounts into money to exchange for goods. 

Whether it is a Wall Street broker buying stocks and 
bonds by the million, or the driver of a truck, or the sales- 
girl in a department store, or the grocer or the butcher, or 
the man who digs in the trench, the common end of all is to 
get the tiling we call money, in order that they may ex- 
change it for the things they want, knowing that as soon as 
they get money they can satisfy their wants, however simple 
or complex. 

What is Money ? 

Money is a commodity which mankind voluntarily ac- 
cepts in exchange for all other commodities and services 
Any commodity to answer as money must have certain qual- 

4Men discover the need of a common medium of exchange as soon as society 
emerges from the patriarchial state, where each group of persons is sufficient 
unto itself. They learn by experience that one who wants wheat and has only 
skins to exchange for it, must meet someone who has wheat and wants skins, 
and that much time and labor may be lost before the two can find each other. 
Then more time may be lost before they can agree upon the ratio of exchange 
at which the two articles should be exchanged for each other. The few and 
simple words with which Aristotle has treated this subject cannot be bettered. 
Whole tomes have been written to say the same things and have ended without 
saying them. White, p. 9. 

5 White, p. 9. 



6 THE PRACTICAL WORK OF A BANK 

ities. It must exist in such quantities as to permit of its 
being obtained without great hardship, although not without 
some labor and hardship, so that its rarity will make it of 
value ; for if it be free for the taking no one will give in ex- 
change for it anything of value. A people cannot use as 
money the thing they do not possess either substantively or 
potentially. It must be possible of obtainment. Whatever 
value to the individual it may have, it must have a value to 
the community as a whole, or it will* not answer as money. 
The things that have, the world over, been used as money — 
hides, shells, tobacco, etc. — have all had a community value; 
and gold and silver have for centuries had this quality for 
reasons hereafter mentioned. 

i A commodity to answer as money should be ductile ; that 
is, it must be capable of being smelted, purified and "coined" 
by being turned into discs, stamped with the insignia of value, 
and, therefore, readily distinguishable as money and the 
value certain. It must permit of being divided into parts, 
each of which is equal to every other part, and the sum of 
the parts equal to the whole. 

There may be fifty fleeces of sheep, all subject to cleans- 
ing and, therefore, pure from dross, but no two would be 
alike in weight or fineness, and certainly not suitable as 
money. A skin might have answered as money for primi- 
tive man, but would be totally inadequate for present-day 
needs. And to attempt to exchange an article of smaller value 
for a skin would be impossible, for to cut the skin might ruin 
it, and the sum of the parts would not be equal to the whole. 
It becomes necessary, therefore, to find something that can 
be divided into minute parts, coined, and of sufficient hard- 
ness to take a stamp and hold it, and to represent in small 
compass much value — that is, exchangeability. It must be 
easily carried about, and, therefore, small in its dimensions. 

The things that have been used as money include skins, 
dried meat, fish, tobacco, shells, cattle, silk, cocoanut oil, 
wheat, rice, corn, iron, copper, nickel, silver and gold. What- 
ever will be generally acceptable to the people will answer 
in a limited sense for money, but not in its widest sense, nor 
over a wide territory. Moreover, all these articles have no 
lasting character. They will not stand the elements, nor are 
they divisible as is rnetal. 

The storv is told of a Connecticut collector of taxes whc 



THE THING WE CALL MONEY 7 

received his taxes in peas — a current article used as money; 
but in rowing his load of "money" down the Connecticut 
River, a rain came up and his "tax money" all spoiled. 

While all the articles mentioned as having been used as 
money answered for a time and to a limited degree, they had 
many disadvantages that were apparent even to primitive 
peoples, and so by a process of evolution, gold and silver 
have come to be used the world over as the money of the 
nations, 6 substitutes in the form of paper, and credit instru- 
ments in the form of bank notes, taking their places only 
that the supply might be safeguarded, the risk of loss re- 
duced, and the abrasion and the annoyance of transferring 
the heavy article avoided. 

The physical difficulties in using metallic money will be 
seen any day around Wall Street and the Sub-Treasury, 
where the shipping of gold is as interesting a process as the 
unloading of a ton of coal, llecently in the call for the first 
payment on the part of member banks to the funds of the 
Federal Reserve Banks, it was suggested that gold certifi- 
cates be sent and not the metal, in order to obviate the physi- 
cal labor of counting the coin. All metals have been used at 
one time or another, but gold and silver are now the only 
basic metals, copper and nickel being used only in subsidiary 
coin. 

The desire on the part of men to adorn themselves has 
had much to do with the use of silver and gold as money, 
and these metals have a commodity value by reason of their 
uses in the arts, and this feature has added much to their 
worth. Whatever man uses for adornment he can use for 
money, if it be generally desirable, but the trouble with such 
a thing as a watch, even though gold, is readily apparent. 

The funds which pass current in a community and 
answer as the common denominator of values as men trade 
with men are two: (a) Money funds, being accumulations of 
gold, silver, bank notes, gold and silver certificates, and 
other forms of paper monejs these passing from hand to 
hand at their face value and freely accepted by all; and (b) 



6A11 writers are agreed that the five requisites to a good kind of money are: 
Portability, uniformity, durability, cognizability, and stability of value. Long 
experience has taught mankind that these qualities are best embodied in the 
metal, gold. White, p. 12. 



8 THE PRACTICAL WORK OF A BANK 

credit funds, such as checks, bank certificates of deposit, 
bills of exchange and promissory notes. 

The bank is the accumulator of the money funds of the 
community and the clearing house for the credit funds. The 
credit funds in their net balances are settled by money funds 
and one is as important as the other. 

Paper Money 

Money in itself has a value. It is useful in the arts. It 
is scarce. It involves labor, risk. Although the one thing 
to be desired of all material things, it is cumbersome and un- 
satisfactory as a medium of exchange. 

We are now speaking of real money, not of promises to 
pay money. All of our circulating medium and all of our 
smaller coins are, either directly or indirectly, promises to 
pay money. In the case . of the former the promise is 
stamped upon them. In the case of the latter it is merely 
expressed in the laws. The difference between real money 
and a promise to pay money is the same as that between a 
meal and a meal ticket — or between a trunk and a trunk 
check. 7 

But money may have a good substitute. As long as 
people know they can get the metallic money, they will be 
satisfied with a representative. They must, however, have 
confidence that back of the representative money there^is 
real money that may be had upon demand; and the faith 
that this is so is the basis of all monetary systems. It is not 
needful that for every dollar of paper money there shall be 
a gold dollar, for the holders of paper dollars will not all 
want gold dollars at the same time. ,Therefore, on the same 
principle that all the depositors in a bank will not want their 
money at the same time, paper money may be issued on the 
theory that all holders of these promises to pay wi]l not pre- 
sent them at the same time. Thus our Government agrees 
to pay to any holder of a greenback the equivalent in gold; 
but against $346,000,000 of greenbacks it holds but $150,- 
000,000 of gold. And this has, as a rule, proven sufficient. 

Such paper money — currency — is generally issued by a 
large bank that is empowered to do so by law, or individual 

-i White, p. 1. 



THE THING WE CALL MONEY 9 

banks under governmental supervision. In England the 
Bank of England issues practically all notes, these being es- 
sentially gold certificates, it being the policy of the Bank to 
have a pound sterling in gold for each pound note issued, 
there being also a small amount of paper money based on 
Government securities. In France, the Bank of France 
issues the notes, and in Germany, the Reichsbank. In this 
country the note-issue privilege is restricted to the national 
banks and to the Federal Reserve Banks. In order that 
these notes may pass current, be above suspicion, and freely 
accepted by the people, the underlying requirement is that 
there shall be no doubt about the ability of the issuing 
institution to pay real money (gold) upon demand. 

The Evolution of a Bank 

The evolutionary process already referred to may be 
seen the more easily by using a simple illustration, which 
begins with barter and exchange and ends in a bank. 

Let us suppose that a blacksmith holds out to the people 
of his community the offer that he will shoe horses and take 
in exchange for each shoe a dozen eggs. He has shoes to 
sell (barter) for eggs. The farmers have eggs to sell 
(exchange) for horseshoes. Therefore, he works on that 
proposition. But in the coarse of time he has a large sup- 
ply of eggs and cannot use them all. He makes it known 
that he will exchange eggs for meat, potatoes, coffee, etc., 
and thus supplies the wants of his family by trading the 
eggs which he gets for shoeing horses, for other tilings. By 
and by he has a large and varied assortment of things for 
which he has traded and cannot use. He is "stocked up." He 
fhen ponders the question and decides upon a new move. 
He concludes that trading is not satisfactory, because there 
is no unit of value. He cannot exchange a beef for eggs, 
for it would require too many to make the trade fair. He 
finds eggs breakable and hard to keep. Therefore, he hits 
upon a new device. He takes a lot of horseshoe nails and 
stamps his initials upon them, and in return for various com- 
modities gives his tokens of value — so many nails for an 
egg, a peck of potatoes, etc. These he agrees to take back 
from anyone in exchange for goods or services. He will 
give three eggs for three nails. Or, if he takes eggs for 



10 THE PRACTICAL WORK OF A BANK 

flour, shoes, etc., and there is a balance that the other party- 
does not wish to trade out, he simply hands him the horse- 
shoe nails, good for commodities when presented by anyone. 
We thus have token money. The blacksmith's nails would 
be good only where he is known and trusted. They could 
not circulate far from home. They are local money only. 

Let us suppose that he adopts a higher standard of value 
— copper discs instead of iron nails; then silver discs, more 
carefully made; then gold coins with his monogram. Each 
of better metal, more lasting and more scarce. In the course 
of time these, too, become inconvenient to carry, and he 
issues instead paper certificates, agreeing to give metallic 
discs in return for the paper, which answers the purposes 
fully so long as no doubt exists as to the blacksmith-banker 
being able to make good his promises. 

To carry on the simile, suppose farther that a farmer 
wants to buy something the blacksmith has not on hand. 
He, therefore, gives him a written promise that he will re- 
turn ten nails at the end of the month if the blacksmith will 
loan him eight nails for that time. The blacksmith has made 
a loan. Another farmer brings in a load of produce. He 
does not want nails, he may lose them; they are heavy. He 
prefers to trust the blacksmith with his produce and asks 
simply that he get a receipt. The blacksmith, therefore, 
opens a book account with the farmer, gives him a receipt, 
and credits him with the amount agreed upon, subject to the 
latter's order. He can come in person and demand the re- 
turn of the amount due him, or he can transfer his 
right to another. From time to time he gives orders to his 
neighbors to go to the blacksmith and get nails on his ac- 
count. He has thus opened a deposit and checking account. 

Suppose two farmers have traded together and settled 
the debt, one by giving the other his promise to pay at a 
certain time, in nails of the horseshoer. The seller wants the 
tokens to use for other purposes. He, therefore, takes his 
neighbor's promise to pay, to the blacksmith and the latter 
buys (discounts) it, charging him for the accommodation. 
He has thus made a discount. And so we have a "bank," 
loaning, discounting and receiving deposits. And many a 
prosperous bank to-day is the outgrowth of just such a sim- 
ple process, varied, of course, as conditions vary, but funda- 



THE THING WE CALL MONEY 11 

mentally the same. Traders become merchants; merchants, 
bankers ; and bankers, banks. 

If we apply the same reasoning to a higher realm of ac- 
tivity and instead of the blacksmith we have a number of 
men — a corporation — authorized by law to issue paper 
money, to loan money, open checking accounts, etc., who as 
evidence of good faith have invested their own money in the 
enterprise, we have a bank. If instead of the horseshoe 
nails, we have finely coined gold and silver, carefully made 
to indicate the exact weight and quality, we have govern- 
ment metallic money. If, instead of the blacksmith's prom- 
ise to take in exchange, we have the general promise or will- 
ingness of all the people to accept because of faith in the 
issuing power, we have the thing we call money and a money 
system. 

With this brief introduction into the nature and uses of 
money we are prepared to see how it is used in banking; 
leaving it to the chapter on credit to treat of the nature and 
uses of credit as it applies to banking transactions. 



CHAPTER II. 

THE BANK AS A CREDIT MACHINE 

Metallic money proving expensive and inconvenient, the 
paper substitute was- devised, and credit operations evolved, 
so that money in the metal is now mainly used only in the 
final settlements and as the basis of the credit system. The 
inconvenience of making payment every time a trade was 
consummated resulted in the system of deferred payments, 
the seller accepting in lieu of his goods a promise in some 
form which, in his estimation, is equivalent to the thing it- 
self. The farmer who takes a load of produce to market 
may be willing to let his account with the buyer run, and 
take in exchange at some future time the tilings he needs; 
and there arises the book account form of credit. He may 
take the buyer's note, and there arises a negotiable instru- 
ment. He may accept a check on a bank, and there comes 
into being another form of credit instrument, in wide use 
and in popular favor. He may take the promise of a bank 
to pay money — coin on demand — and there is issued to him 
another form of credit instrument, the bank note ; or he may 
take a greenback, which is a Government promise to pay 
money. It is for him to decide who his creditor will be, but 
most likely it will be a bank. But whatever form the pay- 
ment takes, it will be some variety of credit, unless the mat- 
ter is settled in gold or silver, which is not the common 
practice. 

If he were a European farmer he might draw a draft on 
the merchant, which the latter would "accept," and the farm- 
er could either keep it until maturity, or sell it to a bank, 
and in this we would have acceptance credit, as described 
hereafter in detail. 

If the farmer becomes suspicious of the merchant, he 
will ask that the book account be settled ; if he questions the 
ability of the maker of the negotiable instrument to meet it 
at maturity he will either refuse it or ask a surety; if he 
questions the solvency of the maker of the check, or the 
soundness of the bank, he will cash it or have it certified as 
soon as possible; if he questions the bank's ability to meet the 



THE BANK AS A CREDIT MACHINE 13 

notes issued by it, he will ask for gold; if he distrusts the 
greenback (as many did in 1893) he will also turn it into 
gold. 

Confidence in the instrument is the basic point, and as 
long as this confidence exists the credit instrument will 
answer all the purposes of money, and be cheaper. 

And so these periodic panics, particularly banking pan- 
ics, are due to the distrust of the community in the ability 
of the debtor to fulfill its engagements. The general desire 
on the part of the people at such times is to change their 
debtors. A run on a bank is simply this and nothing more. 
The people prefer to trust the bank on its notes rather than 
on deposit account, and so withdraw their deposits. If they 
distrust the bank note, they will ask for gold. 

A general liquidation is therefore a general change in 
the relation of debtors and creditors. 

Trust the Basis of the Credit System 

In the end someone must be trusted. The laborer must 
trust his employer from week to week, that he will get his 
wage at the appointed time; the clerk or salaried man trusts 
the firm from month to month. The physician trusts his 
patient, the minister his congregation. The farmer trusts 
the wholesaler, and the jobber the retailer. The retailer 
trusts the consumer and the consumer trusts the employer, 
so that it completes the cycle of credit — trust that 
at the appointed time payment in money or its equiva- 
lent will be made, and this confidence is the very bed- 
rock of all national and individual well-being. And in the 
confidence that men will keep their engagements business 
moves. Moreover, out of this system of trusting, interest as 
a compensation for the use of money or credit arises. 

It is the business of the bank to deal in money, credit 
and credit instruments; to safeguard metallic money and 
create "paper money"; to buy credit instruments and lend 
its funds on the strength of credit instruments. A bank is 
an institution where deposits of money are received and paid, 
where credit is manufactured and extended to borrowers, 
and where the exchange of property is facilitated. Having 
first acquired the confidence of the community, the bank 
extends its credit by purchasing interest-bearing securities, 



14 THE PRACTICAL WORK OF A BANK 

mainly business men's notes, payable at a fixed time, and 
giving the sellers the right to draw checks upon itself pay- 
able at sight. The amounts thus authorized to be drawn are 
termed deposits, the bank being liable for them in the same 
way as for actual money deposited. It is found in practice 
that a bank may safely extend its credit to an amount much 
larger than its cash on hand, the excess being an inexpen- 
sive but useful addition to the world's instruments of ex- 
change. 1 

Manufacturing Credit 

We have said that a bank is a credit manufactory. This 
is its chief benefit to the community at large. It has the 
power to create credit, to make it effective. 

The ordinary American bank, whether a national bank, 
a State bank, a trust company or a private bank, is an 
organization designed to collect the unemployed funds of 
the community in which it is located and to lend these funds 
to the borrowing community, which in a general way may 
be classified as the trading element of that community. In 
short, the business of banking embraces primarily the func- 
tion of collecting and lending capital. Banking, therefore, 
is the business of dealing in credits. 2 

Let us follow briefly this creation of credit. Let us sup- 
pose that an individual starts a bank — to all intents and 
purposes as effective a credit machine as a corporation. 
He has $10,000 capital of his own. His cash deposits reach 
the sum of $50,000 and he has thus $60,000 in cash, con- 
sisting of gold, silver, gold and silver certificates and other 
forms of currency. He knows that as a general rule all the 
$50,000 deposits will not be called for at the same time. 
Ordinarily this is true, and payment of only a small part 
will be required at one time ; but when a larger portion than 
was anticipated is called for, suspension of payment results. 
Moreover, there will be deposited daily, as a rule, about as 
much as is drawn out, so that the amount of cash is at the 
$60,000 point most of the time. The banker argues that if 
with $10,000 of his own and a reputation for honesty and 

i White, "Money and Banking," p. 226. 

2J. H. Talbert, Vice-President National City Bank, New York, lecture be- 
fore New York Chapter, American Institute of Banking. 



THE BANK AS A CREDIT MACHINE 15 

business sagacity, the public will trust him with $50,000 on 
the strength of his original capital, he can further extend his 
operations by using the whole fund as a basis of credit. He 
can begin to operate a credit machine. His statement would 
now appear as follows: 

ASSETS LIABILITIES 

Cash on hand $60,000 Capital $10,000 

Due depositors 50,000 

Total $60,000 Total $60,000 

Operating a Credit Machine 

The banker now begins to discount promissory notes 
and to make loans. Pie has found by experience that 
$10,000 in cash meets all his liabilities, and he can therefore 
safely extend credit to four times his cash holdings. He does 
not pay out money for the loans he makes, nor for the dis- 
counts, his clients being satisfied, and preferring to have 
credit on his books for the amount, against which they can 
draw their checks. The proceeds of the loans are placed on 
deposit and we therefore find his statement to be as follows : 

ASSETS. LIABILITIES 

Cash on hand $60,000 Capital $10,000 

Loans and discounts 200,000 Due depositors 250,000 



Total $260,000 Total $260,000 

If by this process the banker with but $60,000 in money 
has created something that will take the place of money in 
payment of obligations, he has created a new force in the 
world, and this force is credit. If all the depositors should 
draw their checks for the full amount due them and put 
them in circulation and they came home for payment in a 
short time, with but $60,000 to meet them, the banker would 
soon become insolvent — unable to meet his obligations; but 
against the debts he has incurred he has obligations due to 
him; and he, therefore, has taken the loans and discounted 
the notes with a view to their maturity, and out of the pro- 
ceeds of the maturing loans he expects to pay those who pre- 
sent checks. There is, therefore, a constant inflow and out- 
flow of cash, the one offsetting the other. 

Just what proportion of cash he must keep on hand to 
be safe, is the art of banking. To keep his assets "liquid" — ■ 



16 THE PRACTICAL WORK OF A BANK 

that is, running all the time, so that as funds are demanded 
funds will be received — this is to keep a bank safe. If too 
large a portion of cash is on hand, evidently the profits will 
be less; if too little, a heavy demand cannot be met without 
sacrifice of some of the securities or calling loans. Some 
banks in the war period of 1914 had as high as fifty-one per 
cent, of their liabilities in cash — a very large and unprofit- 
able amount. They were fearful that heavy demands would 
be made on them, and, therefore, allowed cash to accumulate 
until satisfied that there was enough. On the other hand, 
however, in ordinary times as low as fifteen per cent, is suf- 
ficient, and in savings banks, with the notice of withdrawal 
permissible by law and the widely scattered depositors and 
the constant inflow of cash, a reserve of less than ten and as 
low as five per cent, is sufficient. 

The checks which are drawii against the deposit liability 
of the banker are as effective as the cash itself to settle debts. 
They do not circulate with the same freedom as money, inas- 
much as they are of non-uniform denomination, and not so 
widely known as bank notes, and subject to fraud and for- 
gery; but they are a very potent force in the business world, 
it being estimated that fully ninety-five per cent, of the 
transactions are carried on by their use, and in the wholesale 
trades in some sections ninety-eight per cent, of the bank 
deposits are in form of checks. 

Forms of Bank Credit 

As a credit machine the bank creates two main forms of 
circulating credits: bank notes and checks. The bank notes 
are merely its promises to pay on demand. The checks are 
simply the representatives of the book accounts. Thus, I 
have an account with a bank. The bank owes me so much 
money. The evidence consists of my account on its books 
and its account with me in the pass-book furnished for that 
purpose. I draw my check as my lawful right and send it 
to my creditor. I put that much of my account in circu- 
lation. It passes from hand to hand, place to place, until it 
comes back to the bank for payment, when the debt to me is 
cancelled and the instrument no longer in effect. 

It is the same with the bank note. I borrow, say, $100 
from the bank. I receive in return for my note the prom- 



THE BANK AS A CREDIT MACHINE 17 

ises of the bank to pay to bearer the amount, which is repre- 
sented by twenty of its promises to pay to bearer $5 each on 
demand. I pay one debt after another, and place these in 
circulation. They remain out longer than my check, for 
anyone will accept them at their face value, and consequent- 
ly they circulate more widely than my check, which has no 
standing where it is not known ; for while checks come home 
quickly for payment, bank notes remain out longer. But 
both are obligations of the bank to pay money. 

Bank-Note Credit 

The banker, therefore, creates a very powerful form of 
credit in the bank note, which is nothing but his promise to 
pay to the holder of the note the amount named. It is, of 
course, issued in more elaborate form than the check, and is 
usually finely engraved to prevent counterfeiting. It may 
be secured by a general lien upon the banker's assets, as in 
Canada; by a deposit of Government and other bonds, as in 
the case of the national bank notes ; or by a combination of 
bonds and commercial paper, as in the case of the emergency 
currency issued by the banks in the summer of 1914; or by 
part gold and part commercial paper, as will be the notes 
issued under the new Federal Reserve Bank System, and as 
now obtains in Germany: but the elementary principle is the 
same in all cases — it is a promise of the bank to pay. There 
may be a fund held by some central authority out of which 
the notes will be paid as presented; or a fund lodged to 
guaranty the payment of all notes issued by all banks, as 
obtains in Canada; but the point we now emphasize is the 
fact that by issuing notes the bank incurs the same obliga- 
tion that it does in certifying a check, or in allowing its 
depositors to draw on it. 

The obligation of the bank on the checks of its depositors 
and on its notes is identically the same — both are demand 
obligations. The customer issues his checks as needed, while 
the bank only issues its notes on request where checks 
(deposits) will not answer. For instance, a customer wishes 
a loan of $1,000 for the purpose of paying off the farm 
hands. Checks will not do. Wages, as a rule, must be paid 
in money. Therefore, the banker issues $1,000 of his own 
promises to pay — bank notes. Gold and silver might be 



IS THE PRACTICAL WORK OF A BANK 

given, but both are heavy and cumbersome. Therefore, 
people generally have come to prefer paper money to metal- 
lic, using the latter chiefly for small change operations. 

The farm hands pay their grocer and butcher, who may 
in turn pass the notes on, or deposit them in the bank; and 
thus in due course they will come back like the check, and if 
the holder so demands, will be paid in coin as the promise 
contemplates. 

The bank notes will be paid out of the same fund as the 
checks, it being the privilege of the borrower to name which 
form of bank credit he prefers. The banker has no option 
in the matter, but inasmuch as he deals largely with his own 
customers, he takes it for granted that most of his loans and 
discounts will become deposits. It matters but little to the 
banker which form of credit instrument is issued, but the 
bank check is less expensive than the notes, there being no 
tax on the former; but the latter stay out longer and are 
usually considered distinctly profitable in their issue. 

An Exchange of Credits 

When the banker makes a loan or a discount he merely 
exchanges one form of credit instrument for another. For 
instance, he takes my note for $1,000 and hands me $1,000 
of his bank notes. The obligation I have assumed to him is 
an asset; the obligation he has assumed on the notes is a 
liability. The one appears on the left of the statement ; the 
other on the right. And in the discount operation for cash 
(bank notes) the bank has exchanged its notes for my note. 

In the discount of commercial paper, the bank has ex- 
changed a less-known credit for a well-known credit. The 
credit of the maker of the note is not generally known, and, 
as in cases where commercial paper is bought in the open 
market from brokers, the credit of the maker is more or less 
a banking secret. The banker passes upon this credit, and 
becoming satisfied that it is good, issues in return for it his 
own credit instruments, and he has thus turned an unknown 
into a known credit. He has made a non-circulating credit 
circulating. He has made the credit divisible, usable and 
good. 

Bank notes, like checks, stay out only so long as they are 
needed. The individual who has a check, as a rule, deposits 



THE BANK AS A CREDIT MACHINE 10 

it promptly for collection; at least he should. He does not 
want to carry it around ; it is idle money to him ; he does not 
want to take the risk of the bank failing before the check is 
paid, and so sends it home promptly for redemption. The 
bank note follows the same rule. It circulates only so long 
as it is needed. If there is an active demand for money, as, 
for instance, in moving crops, there will be large amounts of 
bank notes issued. As soon as the holder has no further use 
for the notes he deposits them in his bank, which in turn 
forwards them for redemption to the issuing bank (through 
the Treasury Department at Washington), and so bank 
notes appear and disappear as business demands, and checks 
likewise. 

Certification Credit 

The bank not only creates credit and credit instruments, 
but certifies to credit. In the certified check it exchanges its 
own for the maker's credit. The credit of the merchant or 
tradesman may be more limited than that of the bank, and 
by certifying to the maker's credit, it makes it more accept- 
able. It supplants his credit with its own. 

This function is quite largely an American development. 
The certifying of a check is simply adding "accepted," 
"good," "good when properly endorsed," "certified," etc., 
on the face, after which when properly signed it becomes the 
obligation of the bank and not of the depositor. It means in 
banking practice that the bank has charged the amount to 
the drawer's account and credited the same to "certified 
check account," and holds the fund awaiting the return of 
the check for payment. It is most commonly used in Stock 
Exchange transactions, such operations being carried on 
quite largely by the use of certified checks. 

In the certification of checks the banker has, therefore, 
simply certified to credit. He has created no new credit, 
but a better class. The credit must be existent when the 
certification is made, and the act of certification in effect 
says to the world: "The depositor whose name appears as 
maker of this check has the amount to his credit in this bank. 
The signature is genuine. We certify to the same and agree 
to pay to the party to whose order this check is regularly in- 
dorsed the amount for which we have certified. The maker 
is discharged of his liability and we assume it." 



20 THE PRACTICAL WORK OF A BANK 

It can readily be seen that this results in the check hav- 
ing a wider and freer circulation than would the maker's 
individual order; for his was an order, while the bank's cer- 
tification has made it a promise. And certified checks to a 
very large extent circulate as money, being freely accepted, 
and are the medium of the large payments, as bank notes are 
the medium of the small. 

Of course, there is such a thing as a false certification, 
made in fraud, and this has no weight to bind the bank; but 
the certification, if regular, works as above noted, and the 
bank is responsible for the amount of its certification even 
though it has certified a raised check. But the bank could 
only charge the maker in the amount originally drawn. 

Having established his own credit, the banker thus trades 
upon that credit, by adding to, or supplementing, the credit 
of others, and he thus operates a credit machine. 

Acceptance Credit 

One striking difference between European and Amer- 
ican banking lies in the form of credit extended. In the 
American bank a loan is primarily a cash advance. The 
banker may not actually lend the cash, but he must stand 
ready to redeem the checks drawn against the credit which 
he passes when a loan is made. If he is asked for a loan, he 
looks in his till, and if he finds a dollar he may lend four; 
and if he lends four, he must keep one in his till. Our sys- 
tem of reserves requires it. He must regulate his affairs 
according to his cash; while the European banker lends his 
credit. He does not concern himself about the cash, for the 
contract of the one for whom he makes the advance is that 
he will have the funds in the banker's hands when the ac- 
ceptance is due. 

The acceptance is highly developed in European coun- 
tries, being a very common form of credit instrument. The 
operation of a bank acceptance will be seen by taking a 
typical English case. Let us assume that an importer of 
coffee in London is about to bring in a shipment from Bra- 
zil. He is in good standing at his bank and arranges the 
transaction through its office. 

The bank agrees with him that upon the presentation of 
a draft with documents attached, signed bv the seller of the 



THE BANK AS A CREDIT MACHINE 21 

coffee, they will accept it, and give him an instrument called 
a "letter of credit" to this effect. He sends the letter of 
credit to the coffee merchant in Brazil, who draws a bill of 
exchange on the London merchant, ships the coffee, attaches 
the bill of lading and insurance papers, and takes them to 
his local bank. The local bank being assured of having the 
bill taken care of in London, buys it of the coffee merchant 
and forwards the draft to the London bank for acceptance. 
Upon reaching the latter, it will be "accepted," after which 
it can be sold in the open market ; for having the acceptance 
of a well-known London bank it becomes "prime" paper — - 
the very best. 

Let us see what this means. The bank has parted with 
no money. It has simply agreed that at the end of three 
months from the date of acceptance there will be paid at its 
banking house, to the holder in due course, the amount of 
the bill. The merchant for whom the acceptance was made 
has agreed with the bank that he will have the funds in its 
hands to meet the acceptance. By arranging the acceptance 
the merchant may obtain the goods and in the course of the 
term of credit turn them into funds, and with the proceeds 
of the sale make provision for the debt when due; and he 
has, without involving any money of his own, except his busi- 
ness capital, carried through a business transaction. 

The bill might have been drawn on the buyer and ac- 
cepted for his account by the bank, or upon the bank direct ; 
but by writing its name across the face the bank has given 
new power to a credit instrument — put it in position to cir- 
culate freely in the money market, and be taken without 
question by anyone looking for an investment. 

For thus lending his credit the banker will charge usu- 
ally a quarter of one per cent, for three months ; but since it 
involves no cash, but only credit, it is all profit to the bank. 
The rate at which paper bearing a first-class bank accept- 
ance will be discounted is so favorable that it will be profit- 
able for the merchant to pay the bank's commission in order 
to obtain the lessened discount rate. 

The acceptance form of bank credit is not as yet a factor 
in American banking methods, but under the Federal Re- 
serve Act and the New York Banking Law banks may 
make these acceptances and are already doing so, there being 
upwards of $15,000,000 in banks and trust companies in 



22 THE PRACTICAL WORK OF A BANK 

New York on July 1, 1914, when the State system had 
hardly begun to operate, and the Federal Act not then in 
active operation. 8 

This power to make an acceptance is the highest form of 
bank credit and enables a bank to capitalize its credit and 
make it effective. Imagine with what readiness a draft ac- 
cepted by the National City Bank of New York would sell 
anywhere. The buyer would not care who made the draft, 
or on whom drawn, as long as the name of the National City 
Bank appeared thereon it would pass in any market where 
the National City Bank was known. And all this without 
the use of a single dollar of money. The great London 
banks have out in acceptances about $100,000,000 all the 
time, and by so doing they add this much to the working 
capital of the country. 

In times of stress these acceptances may be discounted 
freely at the central banks, being "two-name paper" as re- 
quired by their rules; and by the rediscount system they are 
turned into a circulating medium — bank notes, freely 
accepted everywhere. 

In the acceptance credit we have a form of pure credit, 
although it may have security ultimately back of it; but as 
it operates, it is essentially credit, being based upon the 
standing of the acceptor, as a promissory note is based upon 
the credit of the maker. 

The Limits of Bank Credit 

There is a limit to bank credit in this country, based 
upon our system of rigid reserves, which until the enactment 
of the Federal Reserve Law was as high as twenty-five per 
cent., now reduced to eighteen per cent. Part of this could 
be kept in other banks, and part in cash in the vaults ; but the 
reserve must be maintained as a matter of complying with 
the law. But whatever the amount of the cash in reserve, it 
is obvious that the bank with $60,000 in cash cannot meet a 
sudden demand on the part of its depositors for four times 
that amount unless it can quickly obtain the money due it 

*On March 6, 1915, the acceptances of the Federal Reserve Banks constituted 

23 per cent, of the commercial paper held, which amounted to $25,731,000. 

On June 10, 1916, acceptances formed 32.2 per cent, of the total assets of the 
Federal Reserve Banks. 



THE BANK AS A CREDIT MACHINE 23 

on loans. These may not mature quickly enough to satisfy 
the demands of depositors, and nothing but bankruptcy fol- 
lows. If there can be found a way by which these promis- 
sory notes may be turned into money before they are due — 
their payment anticipated; if the bank which holds them can 
sell them to some other bank that may have money to spare, 
such a condition can be avoided. 

There has probably never been a case where all the 
bank's deposits were called for at one time, but something 
approaching it was experienced in 1907 when one bank paid 
out as high as seventy per cent, of its deposits in a few 
weeks. This is said to have been the most memorable run 
ever experienced by a bank without closing its doors. 

Up to the present time, we have had no institution or 
class of institutions equipped for rediscounting, and banks 
facing a sudden demand for liquidation by depositors could 
only gain help by selling (rediscounting) their note holdings 
to a correspondent, or by selling securities. The former 
might not be possible and the latter costly. But under the 
Federal Reserve Act a bank can now send the paper it holds 
to its Federal Reserve Bank for rediscount, the latter mak- 
ing payment for the same by issuing its notes on the secu- 
rity of the commercial paper so deposited. In other words, 
on the strength of the promises of a number of approved 
merchants and others to pay a certain amount at a certain 
time, the Federal Reserve Bank will issue its notes which 
promise to pay on demand a specified sum. This is 
the principle of the clearing-house loan certificate elsewhere 
described. Thus we have a bank and a central bank creat- 
ing credit instruments, making circulating credits out of 
fixed credits, backed in the main by other credit instruments 
— promises to pay — and ultimately gold. 

There is thus a limit to a bank's discounting powers — 
this limit being the probable call of its depositors. The 
law may estimate that twenty-five per cent, cash on hand is 
sufficient; but the banker himself must be the best judge. 
The penalty for over-discounting is the probable difficulty 
that might arise if more than the estimated portion de- 
manded their money at one time. The advantage of large 
discounts and low cash is the profit that arises ; for the larger 
the loans and the less the idle money, the more the resultant 
profit to the bank. In England there is no law as to re- 



24 THE PRACTICAL WORK OF A BANK 

serves, the banks being free agents, regulating their reserves 
according to the conditions, expanding and contracting as 
the occasion warrants; and English banks have an enviable 
reputation for the quality of their administration. 

But the great central bank stands as the backbone of the 
banking system, operated not for profit but service, and 
which can and in Europe does carry large cash reserves (in 
France as high as seventy-five per cent, at times), so that 
demands can be met and rediscounts made under all condi- 
tions. The strength of the Bank of England was never 
better shown than in the present war, during which it has 
accumulated the largest gold fund in its history, discounting 
at normal rates, and throughout the crisis proven its title 
as "the greatest bank in the world," because greatness in in- 
stitutions as well as men is measured by the way they con- 
duct themselves in trying times. 

The Clearing of Bank Credits 

The bank, in its broadest sense, acts as a credit clearing- 
house. The scope may be local, national or international; 
but its function as a credit machine is to offset debits 
against credits, and the process that obtains in a small com- 
pass operates in a wider sphere. Let us suppose that there 
are ten merchants in a town doing business with each other. 
They all have accounts in the local bank. They buy and 
sell among themselves, and in payment give checks on the 
bank. These are deposited, and all the bank does is to 
charge the one and credit the other. It "clears" the credits. 
If they should all go out of business, the bank would pay 
each, in cash, the net balance that resulted from their oper- 
ations. In other words, it would "settle" the balances in 
cash. And expanded to its ultimate horizon, this is what 
the bank does as a credit-clearing machine. 

The bank receives checks from all sources, particularly 
its customers, and sends them for collection through routes 
and machinery described in the chapter on checks; but it 
does not ask that the checks be paid in money; all it wants 
is a draft on some large city bank. If two banks are in the 
same town, each morning they will exchange checks, and 
the balance will be adjusted by the debtor bank drawing its 
check on its reserve correspondent in settlement. In some 



THE BANK AS A CREDIT MACHINE 25 

cities operating clearing-houses, checks will be exchanged 
through the clearing-house, the banks which owe balances, 
sending their draft to the clearing agent, and the clearing 
agent settling with the creditor banks. No money passes, the 
drafts on New York, Chicago, or other large city, being the 
medium of payment. In large cities only the net balances 
of clearing operations are paid in money. Checks deposited 
by customers are credited to their accounts; notes are col- 
lected and credited as a deposit; checks drawn by depositors 
are paid by clearing, or by drafts, as above noted ; bank notes 
are issued on the credit of the bank, and so banking from 
first to last is a credit operation. 

International Clearings 

While the clearing process may seem complex, especially 
in foreign exchange transactions, it is based upon the funda- 
mental proposition of two men meeting and adjusting their 
debts. In the place of men, however, we have banks, com- 
munities and nations. If merchants in the United States 
sell to merchants in England a million dollars' worth of 
goods, and English merchants sell our merchants five hun- 
dred thousand, obviously England as a mercantile commu- 
nity owes the United States half a million dollars. Our 
bankers might be and generally are satisfied to have credit 
with English bankers for the amount, against which they 
can sell exchange — that is, take money on this side and give 
orders on the English bankers which the latter will honor. 
But if the American bankers should want payment in cash, 
gold would be sent by steamer to New York, and we would 
thus have a "gold movement." . 

The elementary principle throughout all these transac- 
tions, from the settling of a debt between two merchants, by 
one giving the other a check on his bank, which is deposited 
in the same bank ; the merchants of a city settling their debts 
the one against the other through the medium of the banks; 
the banks settling through the clearing-house ; the settling of 
balances due from place to place, country to country, 
through the selling of bankers' orders, involves the same 
idea — an exchange of credits. Banks are the medium 
through which these exchanges are made, money being used, 
if at all, only to adjust the net balances. 



26 THE PRACTICAL WORK OF A BANK 

This credit machine is a wonderfully delicate machine, 
and of great usefulness. It moves silently and effectively, 
and works perfectly under ordinary conditions, and only 
under such unusual conditions as are brought about by a 
great war is the equilibrium disturbed. By gathering the 
idle capital of the community as deposits, and thereby sup- 
plementing its own; by creating credit instruments; by ex- 
tending credit; by certifying checks; by keeping its reserve 
as a safeguard to its credit operations and by paying its de- 
positors' checks, the bank acts as a vast credit machine in the 
mercantile world — a public benefactor as well as a source 
of private gain. 



CHAPTER III. 

BANKS, BANKERS AND BANKING 

The four most important industries are agriculture, 
transportation, manufacturing and banking. Agriculture 
produces the raw material; transportation carries it to the 
manufacturer and to the consumer; the manufacturer turns 
the raw material into finished and usable products, and 
banking provides the financial and credit machinery by 
which these processes are made possible. The peculiar func- 
tion of the bank is to furnish the capital and the credit. 
The other industries employ it. Without the bank, trade 
and industry could not have attained the present high state 
of development, for banking has been the chief motive power 
in the advance of material civilization. 

The marvellous development of Germany as a nation 
demonstrates this fact; and that development is largely due 
to the interest taken by the banks in the material welfare of 
the country. The German banks are closely connected with 
all sorts of improvement schemes. They are represented on 
the board of directors; they keep in close touch with the 
businesses which they have financed. For instance: a steam- 
ship company is formed to operate a new line of steamers. 
The bank becomes, in a sense, a partner. It provides the 
capital necessary to develop the company, taking back bonds 
or stock in pajnnent. When the project is finished, the se- 
curities are sold to the clients of the bank, with the latter's 
moral, if not legal, guarantee that the proposition is sound 
and worthy of investment, and a new fund is in hand for an- 
other work. By thus getting close to the actual work of de- 
velopment, these banks have played a most, if not the most, 
important role in the marvellous growth of the German 
Empire. 

Banking Machinery Necessary 

It is not enough to produce — to manufacture — there 
must be the financial machinery to carry the burden of 
growing the crops, of taking to market, of turning raw ma- 
terial into usable form, all of which calls for credit, which 

27 



28 THE PRACTICAL WORK OF A BANK 

credit can best be furnished by banking; for by the opera- 
tion of banking credit, one dollar of money does the work 
of four, and by using money as the basis of credit, credit 
may, in ordinary times, be extended on the ratio of four to 
one, thus multiplying the usefulness and effectiveness of 
metallic money fourfold. Banking makes money a potent 
force. It makes credit elastic and safe. 

V The Private Banker 

The first bank was a banker. The individual who con- 
ducted a banking business as part of his mercantile opera- 
tions soon found that he could employ more capital than he 
had, and so he associated others with him. It thus became a 
partnership. In the course of time it was found advisable 
to incorporate under the banking laws, or to apply for spe- 
cial charter (in early days most banks were created by spe- 
cial act), in order that the business might be perpetuated 
and that it might expand with the changing needs of the 
community. 

Banking was originally a common law right. Any citi- 
zen could be a banker — if his neighbors would trust him ; but 
the business being more or less of a public character, inas- 
much as it deals with money, credit and credit instruments, 
and by the functions it enjoys touches the public intimately, 
soon became a special privilege, granted by law or the leg- 
islature. While some men could be trusted to use these 
privileges wisely, it would not do to permit anyone to re- 
ceive deposits, issue notes and loan money, for the power 
would be abused. Therefore, public control, both in the 
granting of the privilege and inspection thereafter, became 
necessary for the common good. Even as late as 1913, the 
right to do business as a private banker was not restricted 
or supervised in the great State of New York, and only 
grave abuses at an opportune time led the revision commit- 
tee of 1914 to make adequate provision for the regulation of 
private bankers. 

There are many cases, however, where the community 
would not have banking facilities at all, were it not for the 
private banker, who combines banking with other business, 
and fulfills a very necessary place in the community's life; 
but with the capitalization requirements only $25,000 for 



BANKS, BANKERS AND BANKING 29 

country banks in the National Banking Act, and in some 
places but $10,000 under State laws, the organization of a 
bank is not a difficult matter; and in many, if not most, 
small towns and villages the incorporated bank will now be 
found. But the day of the private banker is over, for in 
the course of events the corporation has become the recog- 
nized form, and only those who are already in the business 
are likely to operate as such. And even these are taking on 
the corporate form as time goes on. 

Not only was banking once incidental to other business, 
but the legislatures were often hostile to granting bank 
charters, and only by subterfuge could a bill be gotten 
through. Thus the famous Chemical National Bank was 
originally the banking department of the New York Chem- 
ical Manufacturing Company. The Farmers Loan and 
Trust Company was the banking end of the Farmers Fire 
Insurance Company. The most notable case is that of the 
Bank of the Manhattan Company, which was chartered pri- 
marily as a water company with banking privileges, but de- 
veloped its banking function much more rapidly than its 
water works, whether by design or not is not the question; 
the fact remains that it is a large and influential bank at pres- 
ent, but the original well and the tank on the roof still re- 
main as evidence that it is a water company primarily and 
a bank secondarily, by charter if not by practice. The char- 
ter after granting it powers incidental to a water company 
empowered it "to utilize its surplus funds in the purchase of 
public or other stocks, or in any other moneyed transactions 
or operations, etc." And thus an innocent appendage to a 
charter to operate a water company opened the door to 
banking functions. For thirty years it was a water com- 
pany, but for a century it has been a bank. 

^ Banks Distinguished 

We must distinguish between those institutions which in 
a sense create capital, from those which work on capital al- 
ready accumulated. Of the former class are to be men- 
tioned particularly the mutual savings banks, which have no 
capital, and whose funds are obtained by receiving the sav- 
ings of the small depositor and combining them into a com- 



30 THE PRACTICAL WORK OF A BANK 

mon fund large enough to make profitable and effective in* 
vestment in mortgage loans and other securities. 

The banks of discount and other capitalized banking in- 
stitutions have as the foundation for their operations the 
funds which have been in a sense made capital prior to in- 
vestment in the enterprise. The stockholder in a bank of 
discount has saved his money until he has accumulated a 
fund sufficiently large to make investment in a bank possi- 
ble. He must have at least $100 in order to become a mem- 
ber of the corporation, while the savings bank opens its 
doors to the man with one dollar and often to the child with 
ten cents. In the one you must be a small capitalist before 
"joining the bank," while in the other you become a small 
capitalist through the bank. The savings bank is the receiv- 
ing reservoir for the little streams, out of which pours the 
larger stream, while the bank of discount utilizes power al- 
ready assembled. In the savings bank every depositor is in 
a sense a stockholder and stands on the same footing; while 
in a bank of discount the depositors are creditors and the 
stockholders, are owners. The savings bank depositor is a 
partner; the bank of discount depositor is a creditor. The 
savings bank agrees to pay back the money on due notice; 
the bank of discount on demand. The savings bank is a 
mutual investment concern more than it is a bank ; while the 
bank of discount and the trust company as generally oper- 
ated, are essentially banks. The savings bank never discounts 
notes, nor issues money, nor, as a rule, does it allow check- 
ing privileges, although in some States it does make collat- 
eral loans to a considerable degree. In New York this is 
permissible, but not indulged in to any great extent. 

We do well to get the distinction between the two clearly 
in mind, for much confusion and misunderstanding of the 
nature and functions of a savings bank have existed, and the 
line of demarcation is sharp and well drawn. Having the 
differences between the two classes of institutions clearly un- 
derstood we are the better able to take up the functions of a 
bank of discount. 



1/ 



Banks Defined and Classified 



Banks may be divided into seven classes: (a) Banks of 
discount, comprising national banks, State banks, private 



BANKS, BANKERS AND BANKING 31 

and individual bankers, (b) Trust companies. These in 
most, if not all, instances do a banking business, and in con- 
nection, a trust, and in some cases, a savings bank business, 
(c) Savings banks, which are essentially investment insti- 
tutions, receiving small deposits for cooperative investment. 
These are further divided into mutual and stock savings 
banks, the latter predominating in the West and South, and 
the former almost exclusively in the Eastern and New Eng- 
land States, (d) Building and loan associations, (e) Mort- 
gage companies, (f) Safe deposit companies, (g) Loan 
companies, personal and chattel. 

A bank of discount may be defined as a moneyed corpo- 
ration, authorized by law to receive deposits and pay checks ; 
discount and negotiate promissory notes, drafts, bills of ex- 
change, and other evidences of debt; to lend money on real 
or personal security; to buy and sell gold and silver bullion, 
foreign coins and bills of exchange; to issue its circulating 
notes; to make collections; and such other moneyed trans- 
actions as are not inconsistent with its charter or the laws 
under which it operates. 

Horace White, in "Money and Banking," defines a bank 
as "An institution where deposits of money are received and 
paid, where credit is manufactured and extended to borrow- 
ers, and where exchange of property is facilitated. Having 
first acquired the confidence of the community, the bank ex- 
tends its credit by purchasing interest-bearing securities, 
mainly business men's notes, payable at a fixed time and giv- 
ing the sellers the right to draw checks upon itself payable 
at sight. The amounts thus authorized to be drawn are 
termed deposits, the bank being liable for them in the same 
way as for actual money deposited. 1 

In "The Savings Bank and Its Practical Work" the 
author of the present work defines a savings bank as "A 
mutual cooperative institution conducted without profit to 
the managers, for the purpose of receiving on deposit and 
for safekeeping such sums as may be offered, limited by the 
law of the State, and investing the same for account of the 
depositors jointly and severally in such manner as shall be 
prescribed by law, and paying to the depositors as interest 
all the earnings of the institution except the amount paid 

i White, p. 227. 



82 THE PRACTICAL WORK OF A BANK 

for expenses and such part as may be set aside and held in 
reserve as a guaranty fund for the benefit and protection 
of all." 

Technically speaking, a trust company is a corporation 
organized for the purpose of accepting and executing trusts, 
acting as trustee under wills, bond issues, registrar of bonds 
and stocks, executor or administrator of estates, etc., al- 
though by law and practice trust companies may do a gen- 
eral banking business, but do not issue currency. 

Building and loan associations are mutual organizations 
formed for the purpose of assisting men to own their own 
homes. They accumulate savings and in many cases do a 
savings bank business, but they are essentially for the pur- 
pose of helping a man save by regular monthly installments 
for the purpose of home ownership, lending only to members 
on real estate security. 

Mortgage, or mortgage investment companies, are de- 
fined in the New York law as "corporations other than an 
insurance company formed under the laws of this or any 
other State for the purpose of selling, offering for sale, or 
negotiating to individuals other than bankers, bonds or notes 
secured by deeds of trust or mortgages on real property or 
choses in action, owned, issued, negotiated or guaranteed by 
it, or for the purpose of receiving any money or property, 
either from its own members or from other persons, and en- 
tering into any contract, engagement or undertaking with 
them for the withdrawal of such money or property at any 
time with the increase thereof, or for the payment to them 
or to any person of any sum of money at any time, either 
fixed or uncertain." 

Safe deposit companies are those renting out safes in 
vaults for the protection of valuables in any form. 

Personal loan companies are those which make a busi- 
ness of loaning on personal security to needy borrowers, 
generally in small sums. Of this class are pawnbrokers and 
other lending concerns which loan on pledge of jewelry, etc., 
or personal indorsement of a third party. This work has 
particular reference to banks of discount, but aside from the 
trust functions, applies equally to trust company operations. 



BANKS, BANKERS AND BANKING 33 

The Functions of a Bank 

The functions of the bank are fourfold : ( I ) To assemble 
capital and make it effective. This it does by assembling 
capital of its own, and by attracting idle private capital. In 
the organization of a bank the stockholders "subscribe" to 
the stock, which simply means that they unite their private 
capital with that of the other stockholders, so that the ag- 
gregated fund becomes the "capital stock" or "capital" of 
the bank. The stockholders are the partners in the enter- 
prise. The profits, if any, belong to them; the losses, if any, 
must be shared by them. In proportion to their holdings 
they are entitled to the profits and likewise must be account- 
able for the losses. As a general rule the liability is twice 
the amount of stock held; that is, if a stockholder owns $500 
worth of stock, he is liable to have his stock cancelled and be 
subject to an assessment of $500 in addition, in case the 
bank fails. This is generally spoken of as the "stockholder's 
double liability." With this fund as a starting point, the 
bank is ready to do business. It loans this fund to borrow- 
ers and thus makes its profits. But if the capital fund were 
all the bank had with which to work, it would not prove a 
profitable undertaking, for after deducting expenses and 
losses, the profits, if any, would be small. It, therefore, in- 
vites the public to open accounts with it, and it thus assem- 
bles another fund, the deposits, which it employs in making 
loans, buying securities, etc., so that we have not only an 
additional fund, but another function of the bank, i. e. (2) 
To receive deposits. Contrary to the prevailing idea, the 
bank does not receive the money offered it for safekeeping. 
Neither does it receive the fund for mutual investment as is 
the case in mutual corporations such as savings banks; but 
the bank of discount in receiving the deposit becomes the 
absolute owner of the fund, and the relation of debtor and 
creditor is established between the bank and the depositor. 
The bank thereafter owes the depositor the amount, and 
agrees to pay the same upon demand. 

It is interesting to note in passing, that while fully 
ninety-five per cent, of the force of the bank is engaged in 
the work arising from the ramifications of the deposit func- 
tion in banking, their efforts produce no income except the 
incidental item of "Exchange." It is the service rendered by 



34 THE PRACTICAL WORK OF A BANK 

them, however, which in a large measure attracts and retains 
the balances which make possible the exercise of the discount 
and lending functions. 

Bank Deposits 

The deposits of the bank are divided into three main 
classes, namely, general, specific and special. The general 
deposit is the most common. The bank receives the fund de- 
posited as its debt to the depositor, mingles the money with 
other funds of like nature and pays the depositor as he or- 
ders, usually upon his check, which will be treated subse- 
quently. 

The contract with the bank in general deposits is never 
that of a bailment, where the bailee receives property with 
the agreement to return the same identical thing. In the 
case of a bank deposit the agreement is simply to return 
money of equal value. 

In case of insolvency of the bank every general depositor 
is a creditor of the bank. Technically every creditor is a 
general creditor. If one is entitled to payment in full, it is 
either because the bank holds a special deposit or security, 
which has always remained the depositor's property, the 
bank being bailee under agreement, or because the bank 
violated a trust and by reason of the wrong holds a special 
fund which belongs to the depositor. In a national bank all 
general depositors and other creditors share alike. In some 
States the depositors in State banks are by statute preferred 
over other creditors and are paid in full before other 
claimants. 

Frequently when a bank fails attempts are made to es- 
tablish rights to preferences by showing that certain deposits 
were special deposits. But the ordinary manner in which 
banks do and in these days must do their business, to satis- 
fy the demands of commerce, facilitate negotiations and 
meet the customs which present-day business methods re- 
quire, and the general intentions of those who do business 
with banks, when sifted out, will show the fallacy of this 
claim for preferences, as well as the obvious injustice of the 
claims. 

Even though the money is deposited for a specified time, 
or upon unusual conditions, if there is no understanding that 



BANKS, BANKERS AND BANKING 35 

the money is not to be mingled, the bank will mingle the 
amount received with the general mass of its property, and 
in most States the deposit is a general one, to be repaid out 
of the general mass of the bank's assets. 2 

The fact that a general deposit is a debt has been held 
by the courts the country over, and as in the case of all debts, 
it can be extinguished only by payment. 

A specific deposit is a deposit made for a specific pur- 
pose, and the bank has instructions to apply the fund for 
that particular purpose and no other; as, for instance, to 
pay off a mortgage, or to pay a note of the depositor. The 
money cannot lawfully be mingled with the funds of the 
bank, it being a separate fund for the particular purpose. 

Special deposits are those where the identical tiling is to 
be returned. It is in a sense a bailment. Thus, if money 
were left in a package; bonds or stocks, etc., left with the 
bank (not in its safe deposit vault but with the bank as a 
bank) it would constitute a special deposit with it, if the 
articles or money were left on such conditions. 

Having distinguished between the various classes of de- 
posits, we are concerned mainly with the first class, namely, 
the general deposits, for these carry another important func- 
tion as well as duty of the bank, i. e., to make payment 
when, to whom and in the amounts designated by the depos- 
itor, commonly called the (3) Checking function, which has 
grown to such proportions, and is such an economic neces- 
sity, that it may be considered one of the elemental and most 
important functions of hanking, although it necessarily 
follows the deposit function. 

Briefly stated, the checking function gives the depositor 
the right to draw checks on the bank in such sums as he may 
choose, payable on demand, to the party designated or to 
bearer, together with the right to rescind the order before 
payment, and the bank is bound to pay on regularly issued 
orders as long as the maker has credit for the amount named 
with it. 

(4) The function of discount, which includes the loan, 
the distinction being trifling between the two. In a dis- 
count the process is usually as follows: A presents a note 
payable to his order to the bank and asks, not that the bank 

2The Law of Bank Deposits, Weitzel, p. 8. 



36 THE PRACTICAL WORK OF A BANK 

make a loan on it, but that the bank discount (buy) it. This 
it does by deducting the interest from the amount and turn- 
ing the proceeds over to him. If he had presented his own 
note to its order and asked for the money, the bank would 
not make a discount in the technical sense 8 , but loan him the 
amount, taking his note in evidence thereof; and whether the 
interest was deducted when the discount was made or col- 
lected at maturity, it would be a loan and not a discount. 
These advances are usually reported under the head, "Loans 
and Discounts," the former including demand and collateral 
loans as well as the time loans. 

In the matter of commercial paper, the bank is frequent- 
ly spoken of as "buying" the paper; while in the strict sense 
it has made a loan through the agency of the commercial 
paper broker. 

The last and a very important function is the issue of 
money, or, to be correct, currency, commonly referred to as 
(5) the note issue power. Bank notes are known to have 
been issued as far back as 16?0, when instruments of writing- 
were issued by the goldsmiths to people who had left money 
in their care. These were in substantially the same form as 
bank notes of to-day, promising to pay on demand a speci- 
fied sum. The right to issue such notes was never ques- 
tioned. They were simply evidences of claims against the 
goldsmiths for money left in their care. As the business 
grew and the quantities of notes called for increased, it be- 
came more convenient to print blank forms, to be filled out 
with the names of the depositors and the amounts due them. 
Still later notes were printed for round sums — five pounds, 
etc. — which could be handled in quantities, and these were 
made payable to order or bearer, according to the wish of 
the depositor. The business of discounting commercial 
paper was added to the goldsmith's vocation very soon after 
the practice of depositing money with him became common, 
and then the notes were issued if desired to the persons get- 
ting the discounts. 4 

The principle of issuing such notes was recognized as a 
right, so long as anybody would take them. But experience 

3 It is the common practice, however, to consider all loans where the interest 
is collected in advance as "discounts" and where the interest is collected at 
maturity or periodically as "loans." 

4 White, p. 225. 



BANKS, BANKERS AND BANKING 37 

soon taught that such a right was subject to abuse, as was 
evidenced by the early days of banking in this country, 
when thousands of merchants and dealers the country over 
put out their promises to pay, until the condition became 
chaotic, and it was recognized here as well as in the early 
days of banking in other lands, that this right to issue cir- 
culating notes was a function that for the good of all had 
to be regulated by the State. Banks were, therefore, char- 
tered with implied or express power to issue notes. Other 
groups of individuals had this right without incorporation 
as a bank, it being the first function of some corporations to 
issue notes before being chartered as a bank. Thus, the 
Bank of New York issued circulating notes seven years 
before it was chartered as a bank. 5 

In the early days of American banking the bank was an 
association of individuals whose main business was to issue 
currency. By the grant of "banking powers" was meant the 
power to issue its notes, and the profit came from the power 
to thus issue notes, charging interest to borrowers, and in 
many cases without capital of its own to safeguard the 
issues. Without adequate redemption features, and by 
fraudulent practices these privileges were abused so that 
banking was looked upon with disfavor by legislators, and 
charters at times difficult to obtain. Daniel Webster is said 
to have observed that the power to issue notes to circulate 
as money was the feature which distinguished a bank from 
every other institution. 6 The issue of notes is not now the 
function of State banks, the National Banking Act placing 
a tax of ten per cent, on all issues of State bank notes, so 
that it becomes unprofitable, and no State notes have been- 
issued in many years. In the revision of the New York 
Banking Law in 1913 the sections relating to note issues in 
the old law were entirely eliminated, it being considered 
that the issue of notes by State banks in New York was no 
longer a probability and the law therefore makes no pro-* 
vision for such operations. 

s White, p. 225. , 

6 White, p. 217. 



CHAPTER IV. 

THE ORGANIZATION AND ADMINISTRATION 

OF A BANK 

The organization of a bank may be due to any one of 
several reasons, such as a desire on the part of a bank man 
for an official position ; an attorney desirous of bank patron- 
age; dissension among the directors or stockholders of one 
bank, which results in a rival institution; public spirit, which 
appreciates the need of and benefits of a banking institution; 
the work of a professional promoter, etc.; but in the last 
analysis, the bank results from the desire on the part of 
those who have capital to employ it effectively through such 
an institution. Otherwise the capital stock could not be 
assembled. 

There may, of course, be ulterior motives back of it all, 
such as a desire to secure large accommodations as borrow- 
ing directors, but the reason last noted must be controlling 
if the bank is to secure support from moneyed interests. 

Through the agency of the bank funds which are idle 
are brought into use and employed profitably. Through 
the medium of the bank the man who needs and can use 
funds meets the man who has funds to loan. Thus produc- 
tion is greatly stimulated and capital increased. And for 
the bringing together the banker is entitled to his profit, as 
well as is the capitalist, large or small, who furnishes the 
means that make the banking operations possible. 

It is possible to conceive a bank starting with no funds 
of its own, but holding itself out as willing to loan the funds 
of others who will entrust their property to it; but in such 
a process there would be no assurance of the wise use of the 
funds so deposited, or their return at the appointed time. 
And for the sake of having loanable funds at the opening of 
the bank, and a fund to safeguard those who will trust their 
money to its use, a capital fund of its own is necessary. The 
trouble with many of the old State banks was the lack of 
capital, except in the form of promises, and debts cannot 
long be paid by promises. And inasmuch as banking is a 
credit operation, and the bank a credit machine, it must have 



BANK ORGANIZATION AND ADMINISTRATION 39 

credit before it can operate profitably and successfully, and 
to do this capital is necessary and a surplus or guaranty 
fund quite as much so. 

To organize a bank, therefore, there must be an accumu- 
lation of capital which has already been gathered by individ- 
uals. As a basis of its own credit this is absolutely essen- 
tial. To allow a body of men to receive deposits without 
some property back of their promises would be foolhardy, 
and the law stipulates how much capital there shall be, and 
regulates the capital to the place where the bank operates. 
This is fundamentally wrong, for the capital should not be 
adjusted to the place but to the volume of business. But it 
works out fairly well, for as a broad proposition a country 
bank will not have the growth that will attend a city bank. 

A national bank was chartered in Oklahoma to operate 
on the outskirts of Oklahoma City. The capital by law 
was but $25,000. In the expansion of the city the territory 
was included, and the bank became a city bank, and sought 
to operate on its old capital. The Comptroller of the Cur- 
rency forbade it to continue to do business under its old cap- 
ital, and suit was brought, and it was held that it must make 
its capital conform to its new environment, the logical result 
being that in a large city its deposit liabilities would in- 
crease faster than in a rural setting, and result in a top- 
heavy and unsound condition. The law contemplates that 
there shall be some proportion between capital and liabil- 
ities. 

The Men Behind 

A bank is merely an aggregation of men and it can be 
no better than its men. A bank never goes wrong of itself ; 
it goes wrong because of the men behind it. It may be 
due to any one of several causes, but failure is, in the last 
analysis, the failure of men. 

"There is no question that we as business men cannot 
solve," said a boastful young man just organizing a bank. 
And not one of the organizers was a banker by training or 
instinct, and yet they proposed to run a bank without the 
assistance of any experienced bank man. But they found — 
as will others — that the rules that apph r to business in some 
forms will not fit banking ; and to be able to run a factory is 
not to be capable of running a bank. 



40 THE PRACTICAL WORK OF A BANK 

Most of all the men must be those who will inspire con- 
fidence. They must have "made good" in their own lines 
and bear a reputation for honesty, sagacity and business 
prudence. The man who has been '"tricky" in business; who 
has made money by unsavory methods; who has the gam- 
bler's instinct and cannot draw the line between other peo^ 
pie's money and his own, has no place in banking. And yet 
such men get in by the force of the dollar, and often carry 
their bank down when they must get out. 

A Surplusage or Banks 

If he who makes two blades of grass grow where but one 
grew before is a philanthropist, what shall be said of the 
man who plants two banks where only one ought to exist; 
and by creating the second makes them both unprofitable 
and great success impossible? There are many towns where 
one bank could serve every need, and would grow into a 
healthy size; and along comes a professional organizer, or a 
disgruntled stockholder, or an ambitious fellow, and starts 
another. And they both just manage to exist. Of the' 
making of banks there seems to be no end. 

But this is not to say there should not be a bank in every 
community. The great development of this country is due 
to its independent banking system, where under liberal 
rules as to capitalization every little town and hamlet that 
can raise the necessary capital can have its bank. But the 
first essential to the organization of a bank is that it shall 
have a fair chance of success. And how some banks manage 
to live and pay the modest rent and the salary of the cashier 
and a dividend large enough to satisfy the directors and 
stockholders, is a mystery. I 

The Charter 

The organization of a bank is a legal matter that must 
follow certain prescribed lines, and conform to legal re- 
quirements. The National Banking Act and the various 
State laws prescribe just what steps are necessary in order 
to form a bank. There must first be the association of a 
certain number of men, usually five or more, who unite 
themselves together for such purpose and apply for a char- 



BANK ORGANIZATION AND ADMINISTRATION 4,1 

ter. The application must be made to the Comptroller of 
the Currency, if a national bank and to the State depart- 
ment which has banks in charge, if a State institution. This 
is generally called the banking department, and the official, 
"Superintendent of Banks," "Auditor" (Illinois), "Com- 
missioner of Banking and Insurance" (New Jersey), or 
"Commissioner of Banking" (Massachusetts). The in- 
formation generally required is the names of the proposed 
incorporators, the name (which must not duplicate or con- 
fuse with any existing bank in the same jurisdiction), the 
place of business and the amount of capital. The latter is 
important, and the law usually stipulates what the capital 
shall be for various places, it being the intent that the cap- 
ital shall be large in large places and small in small places. 
For national banks the minimum is $25,000 in country 
places, while in some States in the South and West, State 
banks may be formed with capital as low as $10,000. 

Upon filing the application for charter, certain formali- 
ties are necessary as to advertising, so that the banking 
world and especially the bank's competitors in the same dis- 
trict may be apprised of the fact. Duplicate papers must 
also be filed in the county clerk's office, as matters of record. 
The State official in charge of banks then looks into the 
matter to assure: (a) That the incorporators are acting in 
good faith; are representative men of business, whose con- 
nection with a bank will bring credit and probable success 
to the institution; (b) that it has a fair chance of success; 
and (c) that the capital requirements have been complied 
with; for it is essential that the bank have the capital fund 
really in hand before opening its doors and transacting 
business. Under the old State regime, banks would organ- 
ize with capital only in the form of promissory notes, and 
promises are a poor foundation on which to build a bank. 

The process necessary to establish a bank differs mate- 
rially in the different States, so that specific description 
would be futile, and those interested in the subject must re- 
fer to original sources for directions in forming a bank, and 
follow the law most carefully. But when formalities are 
complied with there will be forthcoming the charter which 
authorizes the corporation to transact a banking business. 



42 THE PRACTICAL WORK OF A BANK 

The Board of Directors 

Having received permission to do a banking business, 
the organization of the board of directors follows, these be- 
ing elected by the stockholders. The directors choose the 
executive officers, who will have actual charge of the ad- 
ministration of the bank. The magna charta of the bank is 
its by-laws. These are its working rules and principles. It 
is important that they be complete, comply with the law, 
and cover all possible operations in general principles. 

Inasmuch as the stockholders own the bank, they are the 
controlling factors. They elect the directors and the direct- 
ors elect the officers, and the officers select the clerical staff. 

The qualifications for director in a bank differ in the va- 
rious States, but the general qualification is that he shall 
own a certain number of unpledged shares of stock of the 
bank, and, in addition, must control enough votes to 
elect Mm. As a rule, the first directors are named in the 
certificate of organization, these serving as the first board 
until their successors are chosen. 

The administration of a bank centers in the board of 
directors, the court of last resort, presided over by the pres- 
ident. Of late years there has been a growing tendency to 
create something like a "president emeritus" office, designat- 
ed as "chairman of the board," the object of which is to 
honor one who by long service has won his spurs and desires 
to withdraw from the active management of the bank, but 
still hold a rein over the institution. He is, in a large meas- 
ure, an advisory officer, a "big man," and one whose counsel 
hi matters of finance, both within and without the bank, is 
respected. 

The directors operate through committees of various 
sorts, the principal one of which is the loan committee, 
whose function is to pass on loans and discounts, and whose 
judgment may make or break the bank. It is customary to 
delegate certain prerogatives to the attending officers, and 
permit them to make loans up to a designated amount with- 
out reference to the committee; or to grant a line of dis- 
count to a certain individual or firm, it being the function 
of the attending officers to see that the line is kept within 
the limits. 

It not infrequently happens that the president is the 



BANK ORGANIZATION AND ADMINISTRATION 43 

dominating force of the bank, and his judgment obtains. If 
he is a man of sound judgment, a student of business af- 
fairs, he is often trusted with the management of the bank 
without much supervision on the part of the directors or 
loan committee. In fact, he is often the bank, and domi- 
nates its policies absolutely. And it sometimes happens 
that he rules with such an iron hand that he not only dom- 
inates the bank, but wrecks it. More than one bank has 
gone to the wall because its president insisted upon a cer- 
tain line of action, and either in his eagerness to build up 
the bank or in his ambition or indiscretion in other lines, ill- 
advised or too liberal credits, brought his bank to disaster. 

The "One-Man" Bank 

The "one-man" bank has been the subject of many 
pointed remarks. It is everywhere to be found. It exists in 
the little hamlet, and in the big city. The one man may be 
the cashier, the president, a director, or what not, but he 
dominates the bank, either by force of will or force of 
money, or force of neglect on the part of other men. 

This condition is so aptly set forth by Mr. Oscar Tell- 
ing, National Bank Examiner and Chief of Reports Divi- 
sion of the Comptroller's Office at Washington, that I quote 
him at length. In an address before Washington Chapter 
of the American Institute of Banking, he said: 

"The examiners and the Comptroller's Office alike dread 
the so-called 'one-man bank,' conveniently placed in one of 
the following classes: 

"First— The family bank. 

"Second — The bank whose board is dominated by an in- 
dividual, usually an active officer, who controls the annual 
election by owning a control of the stock or obtaining such 
control with the assistance of the 'dummy' stockholder who 
gives his proxy for the asking. 

"Third — The bank whose board is dominated by a 'com- 
munity of interests.' By the expression 'community of in- 
terests' I wish to be understood as defining a condition usu- 
ally brought about by the dominating influences on the 
board, or their financial associates, borrowing an undue 
amount of the bank's funds. In common parlance, being a 
case of 'you scratch my back and. I will scratch yours' or 
'the pouring of the bank's funds into one pot.' 



44 THE PRACTICAL WORK OF A BANK 

"The shadow lines of these three classes of banks so com- 
pletely overlap each other as to make it difficult to locate 
the exact Kne of demarcation, but when trouble comes it 
usually spells disaster to all concerned. Although theoreti- 
cally the stockholders elect the directors, who in turn elect 
or appoint the active officers, in actual practice just the re- 
verse is true, especially in the 'one-man bank.' 

"The individual, the family, or the community of inter- 
ests, as the case may be, elect the directors, the result of 
which election is the most grotesque of all hybrid financial 
creatures — 'the dummy director.' " 

The President 

The president's duties may be simple or complex. He 
may spend his time running the bank or in reading the daily 
paper. He may draw ten thousand for knowing how, or 
nothing for doing nothing. He may be a banker or he 
may be a farmer. He may be aged and infirm or young 
and active. He may be the bank or only part of it; but he 
has certain duties defined by law, among which are: to sign 
certain papers; to attest certain reports and to preside at 
the meetings of the board. He has the by-laws as his guide 
and can make his office a big one or a little one as he 
chooses. 

As a broad proposition bank presidents are chosen be- 
cause of their success in other callings. Few grow up in the 
ranks, for most of the reputed wealth of bank presidents 
has been made in some other line than banking. "He made 
good as d druggist and they made him a banker," is the key 
to many a bank president's enviable reputation. And if he 
made good as a druggist he might make good as a presi- 
dent. And again he might not. It depends upon how near 
the bank he runs can be run like the drug store he ran. One 
such made good, did good and was good, both as a druggist 
and as a banker. 

The Vice-President 

The vice-president is next to the president in power, 
often takes his place and acts in his stead. In large banks 
there are many vice-presidents, who are active officers, hav- 



Legal Couusel 
Consulting Accountant 



Management and Direction 
of Entire Clerical Force 
and Responsibility for 
Proper Execution of Work 



Daily Officers 
Meetings 



STOCK- 
HOLDERS 



DIRECTOKS 



Auditing 
Department 



President 

Vice President 

Policy and 

Negotiations 



London Manager 



London Office 
Acts as Depositary and Fiscal 
Agent. Pays coupons, buys 
and sells cable traasfers and 
drafts on all countries. Ex- 
tends its facilities and assist- 
ance to tourists. Offers dis- 
counts and acts for its clients 
in the London stock market. 
Issues Travelers' and com- 
mercial Letters of Credit. 
Makes offerings of bonds to 
individuals, institutions and 
dealers Makes loans. Accepts 
its clients' time drafts. Pays 
acceptances domiciled at its 
office. 



London Committee 



Vice Presidents 



Negotiations, Supervisioa 

and Direction of 

Business Transactions 



Assistant Treasurer 



Fifth Atenue Branch 
Accounts of uptown busi- 
ness establishments. 
Household accounts of 
Main Office depositors. 
Special conveniences for 
lady depositors. Brauch 
of Bond Department to 
afford customers facilities 
for making investments 
without going down town. 
Safe deposit boxes, etc. 



HAsnstan 
Trust Off: 



Assistant 
Secretary 



Vice President 



Manager 
Boud Dept. 



Vice President 



Assistant 
Treasurer 



Secretary 




I Vice President 
i Asst. Secretary 
i Chief Clerk 



ORGANIZATION OF A LAR 

(Courtesy of Guaranty Ti 



L T " 



Department 



Coupon 
Department 



I Reorganization 
Department 



-f 



Transfer 
Department 



— Registrar 



Foreign 
Department 



Bend 
Department 



Loan 
Department 



Banking 
Department 



i 



-J Special . 



Stenographers 



Mail 
Department 



_] Filiug 

Department 



Purchasing 
Agent 



Messengers 



Publicity and 
New Business 
Department 



Credit 
Department 



Efficiency 
Department 



Corporate Trusts 



Acting as trustee under corporate mortgages. Authentication and delivery of bonds issued under 
corporate mortgages. Custody of collateral pledged under corporate mortgages. Disbursement of 
money under trust indentures arising from insurance, released property, sinking funds, etc. 



Pergonal Trusts 



Escrows & Misc. Trusts 



Acting as executor, administrator, testamentory trustee and trustee under agreements, guardian 
of estates of infants, committee of property of incompetants. Hold3 and invests the principal 



of the estate, disburses income, moneys, real estate. 



Care of money, securities or papers pending the completion of certain transactions or negotiations. J 
Trustee under voting trusts, depository under lease contracts, subscription agreement. [ 



■j Custody & Safekeeping 



Care of securities deposited with the Company for safety or convenience, subject to direction of 
owner. Cutting of coupons and collection of income for account of owner, etc. Watches for 
called bonds, advises of reorganizations, right to subscribe, etc. 



Payment as agent, of interest coupons of various corporations and those of States and 
Municipalities including City of New York. 



Deposit of securities and cash for account of reorganization committees and others, exchange of 
old securities for new upon reorganization, etc. 



Issue and transfer of capital stock of corporations. Records showing the holdings of each 
stockholder in each corporation. Preparation of stockholders lists and drawing and mailing of 
dividend checks of various corporations. 



■j Registration of the capital stock of corporations to prevent over issue of stock. 



Purchase of foreign bills of exchange issued to finance shipments to Europe of cotton, grain and 
other commodities. Issue of commercial and travelers letters of credit. Payment of foreign drafts 
on New York. Sale of drafts on foreign countries and cablegrams on any part of the world. 



Statistical Department ' Compilation of statistical information relative to investments for use of clients and Company. 

Investigation r-—A Examination and investigation of the value of new issues of investment securities. 



Selling Department | | Making offerings of bonds to individuals and institutions and dealers 



Investments of 



Compauy | | Co 



■porate investments of Company. 



■j Making of loans, care of collateral, collection of interest, etc. 



Paying Teller r— — Payment of money drawn by check, examination of signatures and endorsements on checks, etc. 



Receiving Teller 



h- 



Collection Department 



Receipt of money and checks deposited and preparation of exchanges for clearing house, etc. 



Collection of all coupons, checks, drafts, etc. received as deposits or placed for collection. 



Bookkeeping Department, 



K 



Records of depositors accounts, calculation of interest on balances. Records of certificates of 
deposit, etc. General books of company and daily statements. 



Daily calculation and regulation of cash reserve. 



Opening and closing of vault containing Company's money aud securities and constant attendance 
when open. Ccunting of all money and securities placed in or taken out of vault except 
loans, etc. 



Policing bank, attendance on delivery of money, securities, etc. 



All stenography and typing work except special work performed in departments. 



Opening and assorting of all incoming mail and the sending of all outgoing mail. 



"j Filing and indexing all correspondence. 



Store Room 



Printing Press 



Purchase of all books, stationery and supplies used by Company and the keeping of proper 
quantities on hand for quick use. 



Printing of many simple forms and blanks used in connection with Company's business. 



A Pages, runners, etc. for use inside and outside of bank. 



Custody of mailing lists for advertising purposes, preparation of advertisements, arranging for 
publication of advertisements. Preparation of officers bulletin, etc. Interviewing individuals 
and companies to place before them the facilities and service offered by this Company. 



Compilation of information relative to financial standing of individuals and companies 
desiring credit. Investigations for depositors and customers of Company, etc. 



To promote the efficiency of the Company and give customers best possible service. Prepares 
Sta nding of each department monthly from reports and criticisms made by all officers 
and departments. 



GE TRUST COMPANY 
•nst Co. of New York) 



BANK ORGANIZATION AND ADMINISTRATION 45 

ing certain duties to perform. Some act as credit men, out- 
of-town representatives, chief clerks, etc., and are part of 
the every-day organization of the hank. 

In large banks the work of various departments, such 
as the credits, the securing new business, the foreign ex- 
change, the transits, the investments, the buying of paper, 
and other matters of management, are frequently delegated 
to vice-presidents, who are often specialists chosen because of 
business and social connections. It is not uncommon for a 
bank to elect an officer from a certain section largely be- 
cause of his banking connections in that section. For in- 
stance, a bank may want Southern business, and, therefore, 
elects to a vice-presidency, or some other office, the secretary 
of a Southern bankers' association, who capitalizes his ac- 
quaintance among banks and bankers. 

Banks and Banks 

There are bank officers and bank officers. Some will take 
authority or assume it, and act without being told by a com- 
mittee. Such are men of initiative who do things. There 
are others who fear to assume any responsibility, to say 
"yes" or "no" to a proposition, to take an aggressive stand, 
or any stand at all, and always refer all matters to some 
other one, or to the board. 

And there are boards and boards. Some will be con- 
tent to delegate the actual running of the bank to the offi- 
cers — where it belongs — and be content to supervise, hold- 
ing the officers responsible for results and not the process 
by which they were obtained. There are boards that will 
not allow an executive to buy a bill of stationery without 
referring the same to them; and others who never delve into 
such details at all. In fact, they should not ; for if an officer 
be fit to be an officer, he is fit to assume some responsibility. 
And responsibility makes executives. 

The Cashier 

Ordinarily the cashier is the "big man" of the bank, par- 
ticularly in small places. He is at the bank all the time, 
and to him all matters are referred. He is sometimes an 
executive and sometimes a combination of executive and 



Proper Execution o 



Auditing 
Department 



Vice Pre.ldcu 
Policy and 



Vice Presidents 

Ne g olinlious, Supervision 
and Dirtc.ion of 



1 


Londou Office 


Acts as l>epOdltLiry and Fiscal 






and sells cable 




drafts on all co- 










Offers dis- 






in the London s 




Issues Traveler 




niorolul Letters 




Makes offerings 




Individuals, iiisl 








its clients' timet 




acceptances doni 




office. 





Fiftu Avenue Bram 



liu Oiti ce deposit 










ORGANIZATION OF A LAJIGE TRUST COMPANY 

(Courtesy of Guaranty Trust Co. of New York) 



46 THE PRACTICAL WORK OF A BANK 

clerk. In country places he not only signs the official docu- 
ments, and directs the workings of the bank, but also acts as 
teller, bookkeeper and collection clerk. He may be simply 
a clerk with a title. 

Like a good housewife, he is usually busy with many 
tilings about the bank. He takes the minutes of the board 
meetings, makes reports of various kinds, interviews cus- 
tomers, piotests checks, signs drafts, passes upon loans, and 
is the managing force of the bank. The daily statement is 
his guide to the condition of the bank, and he watches two 
tilings particularly: the reserve and the loans. He is spe- 
cially charged with keeping the bank within the law in its 
reserve requirements. He is paid to run the bank, some- 
times to get new business, and to show a profit at the end 
of the year. Doing this, he need not worry. 

Whether the management is by the president, or a vice- 
president, or cashier; and whether there is one vice-president 
or ten, matters not — the bank must be managed; and in 
this, management is the secret of the atmosphere that sur- 
rounds it. : It may be one of good will and helpfulness, 
broadmindedness, kindness; or it may be one of ill will, 
jealousy, meanness and littleness. 

In "The Bankers Magazine" for June, 1914, the author 
expressed himself on the subject of bank management, writ- 
ing under the caption, "Ink Spots on the Ledger," which 
was published anonymously. He here takes the credit for 
the authorship of the article. 

The Ink Spots on the Ledger 

There is a story current in banking circles of a voucher 
check returned to the drawer by a Western bank, with an 
inkspot on it, which resulted in the resignation of several of- 
ficials and ultimately the establishment of a rival institution. 

Just how the blot got there, or what the wrathy and 
irritated depositor did to cause the upheaval, is not public 
property; but the fact remains, the incident caused a tem- 
pest in a teapot and the pot boiled over. 

Perhaps the blot was inadvertently made, as many are, 
and could not be erased. Perhaps it was carelessness on the 
part of some clerk. It may have been due to an antiquated 
inkwell, full of dust and clotted ink. It may have been a 
scratchy pen; it may have been spite. 



BANK ORGANIZATION AND ADMINISTRATION 4,7 

Don't-Care Spots 

Ink spots are often "don't-care spots"; and for the don't 
care, there may be a reason. Take a live, energetic bank 
man, full of vim and vigor, willing to work his head off to 
get somewhere ; hungry for recognition and success ; anxious 
to please the powers that be ; spending his spare time in self- 
improvement — take such a fellow and criticise everything he 
does; praise nothing he accomplishes; belittle his learning 
(which may be greater than his critic's) ; drive him in a cor- 
ner and break Iris spirit with a bale-stick of abuse, and like 
the high-spirited horse that has had the bale-stick applied, he 
may mind you thereafter with fear and trembling, but it will 
be a service of fear and not loyalty. 

Perhaps he has worked hard and faithfully, believing 
that merit would find its reward: and, believing in himself 
and in his job, has fitted himself for larger and better 
things, and knows he can rise to the occasion and make 
good when the opportunity arrives. It comes. With eager 
anticipation he awaits the outcome, only to find some fa- 
vored son of some favored sire in the job he should have 
had, and the ink spot is one of hate. 

Perhaps familiarity has bred contempt; and knowing 
him from a little boy up, the administration has forgotten 
that little boys sometimes grow up to be men. His accom- 
plishments and his talents may be underestimated, or for- 
gotten, or seen at too close range to get the proper perspec- 
tive, and in looking for a man he is overlooked. 

Perhaps some jealous mortal in the same institution has 
concluded that danger lies ahead of him (or her) if this 
aspiring youngster climbs up, and by skillful maneuvering 
convinces the judge and jury that it is for the best interests 
of the bank that no clerk shall ever get out of the underling 
class. In some banks, therefore, a Chinese wall, unsealed 
and unscalable by any in the ranks, separates the office from 
the force, and the ink spots on the ledgers are ink spots of 
despair. 

Do you wonder that men do careless work when their 
initiative is killed, their hope gone? Do you wonder that 
men learn to hate, when hatred is in the air? Do you won- 
der that men become anarchists when the only door of hope 
seems through a little hole in the ground in a quiet church- 
yard, which cures many ills? 



48 THE PRACTICAL WORK OF A BANK 

Do you wonder that under conditions such as are sug- 
gested above (and they do exist) the men should not care? 
Why should they care, when no one cares for them? Like 
begets like. Some men cannot be driven: most men can be 
won. A spirit of kindness and good-will will do more by 
far to generate a spirit of loyalty than all the bale-sticks in 
the world. 

The Optimist's "Good Morning" 

A certain bank in New York took on a new clerk. The 
president came in. "Good morning, Mr. President," said 
the youngster, with boldness and courage. 

"No one here says 'good morning' to me, and don't you 
begin it," was the tart reply. The messenger quit his job, 
and the president should have quit his. 

Not long ago there died a man of the opposite stamp. 
He was a member of one of the big Wall Street firms. He 
was on friendly terms with every man in the office. He had 
a cheery smile and a greeting for everyone from the porter 
up. And when he died they had a memorial dinner with a 
vacant chair, and more than one eye was moist as they re- 
membered the man. 

Bowling Alleys and Chocolates 

Imagine, if you can, the spirit that animates the institu- 
tion whose president put in a set of bowling alleys for the 
boys, and bowls with them! Or the atmosphere of another 
where several boxes of chocolates are kept in a cupboard 
where the boys may help themselves (at a cent apiece), the 
profits going to charity. Contrast this with the institution 
whose executive officer (a big man in his own estimation) 
goes around with note-book in hand and huge specs on his 
nose, seeking whom he may devour. Or another where the 
spirit of espionage is so cruel that a false motion of a teller 
is likely to be taken for theft. 

Ink spots on the ledgers? No, first, ink spots on the 
hopes and ambitions of men ; then ink blots on their work. 

"Cut deep enough," said Napoleon to his surgeon, "and 
you'll find the Emperor." Cut deep enough, Mr. Banker, 
and in every clerk you'll find a man. And to get the best 
out of him you must recognize his aim (if he has any — and 



BANK ORGANIZATION AND ADMINISTRATION 49 

if he hasn't any, give him one) and encourage his ambition, 
engender hope and create an atmosphere of good-will. To 
the good man whose work avails naught there comes de- 
spair, deep and bitter. He may be to blame; you may be to 
blame. But when he concludes that good work gets him 
nothing, and poor work can do him no more harm, he is apt 
to say, "Well, what's the use?" — and this is the beginning 
of the ink-spot period of life, where work is a grind and 
life a dull, desultory thing. 

For the man who is careless, there is no excuse. Gentle 
admonition first, then warning, then a vacant stool. But the 
fault as often lies without the man as within. And the man 
higher up is frequently so perfect in his own estimation, so 
infallible in his judgment, so unerring in his conclusions, and 
so kind withal, that to hold up a mirror and show him what 
sort of a chap he really is, is to invite the bale-stick, and 
bale-sticks break men as well as horses. 

"The Fault, Dear Brutus" 

But there's another side to the question. The fault with 
this maker of ink spots may not lie with his superiors, but 
with himself, that he is an underling. He may not have 
seen his opportunity. He may be so close to himself that 
he cannot see himself. His eyes may have been on the cal- 
endar and clock instead of on his work. When pay-day 
takes a man by surprise, some day he'll be surprised on pay- 
day. Good bank men are not paid by the hour, but by the 
job. Perhaps our disgruntled friend has been frittering his 
time away dabbling in a thousand and one things outside his 
institution. While every man should have a wholesome 
hobby and be a man among men, and have an interest in all 
that goes to make life worth while, still his job should be the 
thing of his life. 

He may be working on the false theory that he has a 
mortgage on the job ahead just because he has a life lease 
on the job behind. The job ahead does not always go to the 
man behind, for the man behind the man behind may be so 
much better qualified that he jumps the job ahead into the 
job ahead of the job ahead. 

Then again he might be so puffed up over himself that 
to give him any more honor or responsibility would simply 



50 THE PRACTICAL WORK OF A BANK 

burst the boiler of self-conceit. Two bank officers in New 
York openly boast that they know so much that they don't 
need books! And their very boast is the measure of the 
men. When a wise man gets into the company of his supe- 
riors, he keeps quiet, listens and learns — the fool talks. 

Self -judgment is a bad thing. It is biased. It is un- 
fair. Our man may have analyzed his desire to get up for 
ability to make good. His longing for notoriety may 
simply be mistaken for ambition. The despair he sometimes 
feels may be due to bad digestion, bad disposition, cigar- 
ettes, drink, laziness. What he needs may not be a raise, 
but a long walk. Not all failures are due to official mis- 
judgment, however much the rank and file may disagree 
with the executives in their conclusions. 

But granting that banking is full of heartaches and 
heart breaks, some just and others imaginary, nevertheless 
the man who can do good work under adverse conditions, 
and keep sweet and wholesome, is bound to win. If he can't 
do his best under the conditions that surround him, he owes 
it to himself to get another job. Round men never fit into 
square holes. But the man who can smile when it hurts, and 
keep sweet when others are sour, hold himself in check when 
others let go, and do good work when the temptation is to 
be careless, indifferent and cross, has in him some of the ele- 
ments, at least, that make for success. Faithfulness, loyalty, 
efficiency and length of service count for much in banking; 
and while the few can sit before the roll-top and pass on 
loans, all can help in keeping the machine running smoothly 
and efficiently, doing its best work, for out of efficient ser- 
vice come salaries, dividends and promotions. 

The House in Which it Lives 

After obtaining a charter and electing the board of di- 
rectors and selecting the officers, it follows that the next 
thing is to provide the bank with a home. Few banks start 
with a building erected especially for them or by them, it 
being against good banking principles to make an invest- 
ment in real estate that has a limited utility so soon; it 
should be built from the bank's earnings, and not out of 
capital investment. A great many banks have, however, 
opened their doors in a building erected especially for their 



BANK ORGANIZATION AND ADMINISTRATION 51 

use, sometimes out of their own funds and frequently by 
syndicates formed in the board of directors who erect and 
equip the building, taking as remuneration a certain rental, 
usually on a sliding scale, so that as the bank grows the 
rental charge will grow with it. 

To discuss the relative merits of different bank arrange- 
ments, the lay-out, the equipment, the vaults, etc., is quite 
beside the scope of the present work, there being much in- 
formation on the subject to be had when the occasion re- 
quires. There are firms which now specialize in bank equip- 
ment and bank buildings, and will contract to erect the 
building, furnish the working fixtures even down to the ink 
wells, and deliver the same ready for business. There are 
other concerns that specialize on bank vaults and their con- 
struction. Others specialize on bank interior arrangement, 
viewed from the standpoint of utility, and any bank con- 
templating the erection of a new building will do well to 
consult with these firms, inasmuch as their experience is 
wide and their judgment good, and there are numerous 
little "kinks" that will help in the work of the day, and 
make the machinery run the more smoothly. 

More and more banks are realizing the advertising value 
of a good outfit. It impresses the public. It looks stable. It 
looks prosperous. There are some large and powerful banks 
housed in quarters that are totally inadequate and unsuited 
to the dignity and standing of the bank, just as there are 
some wealthy men living in modest homes; but the bank is 
entitled to good quarters. It pays to dress well, individually 
and corporately. This is not to say that the bank should 
squander its money as some have no doubt done, but it 
should have the setting that is compatible with dignity. 

The Banking Room 

Marble and bronze are quite largely used for the counter 
screen and lobby fittings, and steel desks and filing cabinets 
are replacing wood. The object is twofold: To eliminate the 
risk of fire and to beautify. One large savings bank in 
New York has no other protection for its records than its 
fireproof building, erected for its own use, and keeps all 
books of records in steel cases, in the open room. The 
chances of fire are very remote, if not entirely negligible. 



XTKU-? N0J.DN1WWM 




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feogg 
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A MODERX BANKIXG ROOM 



BANK ORGANIZATION AND ADMINISTRATION 53 

The tellers are arranged with the idea of being accessible 
to the public, but protected by wire cages and bronze grat- 
ings, the doors of the former being self-closing, and locked 
from the inside so that access can be had only by consent of 
the teller. 

Some years ago a package of money amounting to a con- 
siderable sum disappeared from a trust company in New 
York. It vanished as completely as if the earth had swal- 
lowed it. The teller's cage had been locked; no one but he 
had been in during the day, except an officer, and where and 
how it got away still remains a mystery so far as the public 
records are concerned. It is the custom not to allow anyone 
back of the screen but officers and clerks whose employment 
takes them within the cage. It is a necessary protection to 
the teller. It is also a growing custom to place the officers 
where they are readily accessible to the public, usually sep- 
arated only by a hand-rail. 

It would seem that in a bank of discount with assets of 
two hundred million and more, the tellers would be very 
busy men. They are; but it is safe to say that the sav- 
ings bank teller in a bank of one-eighth the size is a much 
busier man with the public. The reason is that banks of 
discount do not carry the same proportionate number of ac- 
counts as do savings banks. A savings bank with $25,000,000 
of deposits will have over .50,000 accounts; while a bank of 
discount of the same size may not have five thousand. Of 
course, the latter are all active and require much more de- 
tailed labor to handle than do the fifty thousand in the sav- 
ings bank, but the work of the latter is over the counter, 
while the work of the bank of discount is largely through 
the clearing-house and the mails. Therefore, the lobby of 
the savings bank will be a busy place, while the lobby of the 
bank of discount will often be practically deserted. To 
prove this, go into any goodly sized savings bank on Mon- 
day — the busy day of the week. You will find long lines, 
mostly women. Go into a bank of discount of the same size, 
and you will find perhaps half a dozen men, or boys, mes- 
sengers of business houses, etc., delivering stocks and bonds, 
obtaining certifications, making collections, deposits and va- 
rious other errands. This statement does not apply, how- 
ever, to banks doing a large commercial business, or those 
operating savings departments, where the crowd is really a 



joiaic WOIDNIWQVM 




iTiaic niviv 

PLAN OF BASEMENT IN A MODEBN BANK 



54 



BANK ORGANIZATION AND ADMINISTRATION 55 

savings bank crowd and not commercial depositors; nor to 
the large "commercial banks/' The foregoing remarks are 
particularly true of large city banks, which deal mostly with 
large concerns and have a few active and large accounts, 
rather than a host of small ones. There are, of course, banks 
of discount which have a large number of small depositors, 
because of their situation in retail districts, which makes an 
active counter trade. But the teller of the bank of discount 
has much greater responsibilities than does the teller of a 
savings bank, for as will be shown in the chapter on that 
subject, his work is involved with much banking law. He 
must pass judgment on many matters that are peculiar to 
his position. He must take risks that the savings bank teller 
never assumes. He handles more checks in a day than the 
savings bank man does in a month; and in the handling of 
checks there is always risk. 

The lobby is, therefore, arranged according to the needs 
of the bank. Some would want a large space, especially if 
they ever expected to run a "Christmas club," which would 
bring thousands of depositors to the bank every week; a 
smaller one if their business was largely through the mail 
and clearing-house. 

Many New York banks have the bookkeeping staff away 
from the main room, sometimes on an upper floor, with di- 
rect communication by means of telephone, telautograph, 
elevator, tube, etc. 

This is done on account of the space saved for the lobby, 
officers and tellers, as well as to reduce the rental for ex- 
pensive ground floor space, and also to avoid the confu- 
sion that follows the click of many adding machines and 
typewriters. But whatever the arrangement there must be 
quick and silent communication between the bookkeepers 
and tellers, so that depositors' balances may be verified with- 
out acquainting the customers with the fact that the account 
is being looked up. 

Special attention, and properly so, is given to vault 
equipment, it being not only the bank's strong box, but also 
its show place and frequently its silent partner, when boxes 
are rented out. 

Vaults 

A whole book might be written about vaults and their 
construction, and to trace the evolution from the wooden 



56 THE PRACTICAL WORK OF A BANK 

chest with a few iron bands, and two or three padlocks, to 
the massive modern vault, with walls two feet thick consist- 
ing of layers of steel bolted together, a filling of concrete, in 
which steel rails are embedded, doors three feet thick, inner 
chests, steam jets so arranged as to fill the space with live 
steam in a few moments, and in which no man could live, 
electric wires connecting with the outer world, and so ar- 
ranged that to bore a hole as big as a silver quarter would 
bring the police, would be interesting reading, and for such 
information the reader is referred to works on the subject 
of vaults and safe-deposit operations. Suffice it to say here 
that modern vault making is an art, and as the science has 
progressed, burglary methods have improved, so that good 
vault equipment is a proper investment and brings its ample 
return. 

The custom now is to build money vaults within easy ac- 
cess of the tellers, and record vaults within easy access of the 
bookkeepers, and storage vaults for the storage of records 
and papers in some cellar or sub-cellar, where space is not 
so valuable. 

An important and quite necessary official in the bank is 
the guard. He stands in the lobby and directs customers 
where to go for the service they need. He answers ques- 
tions. He can be a mighty force in making the customers 
feel at home. He is sometimes a special officer, and in case 
of any attempt at fraud would be empowered to make an 
arrest. 

Some men have the faculty of being polite yet not offi- 
cious ; serving and yet not appear to serve ; humble yet digni- 
fied ; useful yet not important ; out of the way yet in the way 
when wanted. There is one such in New York, in a bond 
house — a colored man. He will inquire your business, take 
your hat and coat, ask you to have a seat, hand you a paper, 
take your message, carry your card ; usher you into the place 
you want to go with the grace of a Beau Brummel, and yet 
do it so smoothly, so unofficiously, so acceptably withal, that 
you immediately feel that here is a real gentleman, and here 
a good firm; and you like to come back. 

There is "Philip" of the First National Bank of Bos- 
ton. He is so admirably described and so delightfully pic- 
tured by a depositor in that institution, that I have consid- 
ered it a classic and worthy of perpetuation. 



BANK ORGANIZATION AND ADMINISTRATION 57 



PHILIP — AN INSTITUTION 

(An Appreciation by a Depositor) 

WHENEVER I enter or leave the First National Bank 
of Boston I am sure to receive a courteous greeting 
and smile from Philip. Philip is the gentleman of 
color who officiates upon the main floor, answers questions, 
and directs strangers to their proper anchorage. 

He wears, in addition to his smile, a smart uniform of 
blue with white gloves, and West Point itself, even upon a 
field day, does not boast of a more soldier-like personage. 

Any bank can take and safeguard your money, and even 
pay it out to you again on demand. Any bank can, upon the 
presentation of proper collateral, make you a loan, and there 
are many other conveniences and courtesies which can be ex- 
tended; but there is only one bank, to my knowledge, that 
possesses a Philip. "Philips," like poets, are born and not 
made, and so there will never, even during bumper crop sea- 
sons, be many of them. Philip has that rare quality of not 
knowing or appearing to know what manner of man or woman 
you are. To Philip every person entering or leaving this (I 
came near saying his) bank is a potentate and deserving of 
all the courtesy and attention supposedly due a potentate. 

It makes no difference to him whether my clothes are 
ready-made and old or the latest creation of a master, whether 
I am about to deposit millions«or seek a sumll loan — I am a vis- 
itor and a customer, and am, therefore, entitled to instant rec- 
ognition and courtesy or. if I require it, attention and help. 

In a bank, capital and surplus are necessary; officers with 
brains and business acumen are necessary; conveniences and 
assistance are a part of the service you expect; clerks and 
tellers must naturally be in attendance. But besides and be- 
yond all these there is something more to be desired, and 
Philip supplies it. Cold winds may blow or summer's sun 
beat down, rains may descend and floods come, but the cheer- 
ful smile and inherent good nature of Philip are undis- 
turbed. Like the brook, they go on forever. Most of us are 
very human, and we may, at times, be scant with our courtesy, 
yet kindliness on the part of others we never fail to observe 
and appreciate. The little things of life are important. A par- 
ticle of grit may not wreck the machinery of a great estab- 
lishment, but it disturbs smoothness, and makes the cylin- 
ders knock. A lubricant is a fine thing to have handy when the 
gears grind. Philip helps supply the "grease." He makes things 
run easier, he saves "horse-power," he helps us to the best of his 
ability to conserve our energy. What the world needs is more 
kindness ; what the individual needs is more patience ; and 
what banks need is a Philip, for he is more than a faithful 
watchman, more than an efficient servant — he is an institution. 



CHAPTER V. 

DEPOSITS AND THE RECEIVING TELLER 

It was said in a former chapter that one of the functions 
of a bank is to receive deposits. A bank with the aver- 
age capitalization would prove a poor investment for the 
stockholders and a poor asset to the community if it had 
only its own capital with which to work, for the income 
from the capital investment would barely pay expenses. It, 
therefore, invites deposits, it seeks deposits, it pays for de- 
posits and sometimes buys deposits. In fact, some banks 
pay too much for deposits (allow too much interest or on 
too liberal terms), compete with other banks by unsafe 
methods, and so come to grief. 

Bank profits come largely from loans and investments, 
and in order to lend money the bank must have money. If 
it has, as we have seen before, a dollar in gold, it can lend 
four dollars in credit. It can receive interest on four dol- 
lars and only pay interest on one. Some bank men fail to 
grasp this fact, in theory, although they practice it. Most 
banks have more deposits than capital. The deposits earn 
dividends for the capital, and it is good banking to attract 
all the deposits possible and pay as little for them as is 
necessary. 

New York the Deposit Center 

By virtue of the fact that New York is the commercial 
and money center of the country, and particularly by rea- 
son of the fact that there is always a demand for money to 
"carry" Stock Exchange loans— meaning that money can 
be loaned on demand or call in New York at any time at a 
price, sometimes high and sometimes low, but always at 
some rate; and by reason of its being a Central Reserve 
City under the National Banking Act, money from all 
parts of the country finds its way to New York from out-of- 
town banks when there is no use for funds in the country 
districts. These deposits of country banks constitute their 
reserves. The interest on these reserve balances varies, 
but is usually around two per cent. ; and when money is un- 

58 



THE RECEIVING TELLER 59 

employed in other parts of the country, it is sent to New 
York, either for loaning out for the bank's account, or de- 
posited with the city bank on interest according to agree- 
ment. 

The Competition eok Bank Deposits Keen 

The competition for these balances is extremely keen, 
banks operating departments whose sole duty is to solicit 
such accounts. Recently it was announced that a promi- 
nent New York bank would be absorbed. Within a few 
days another bank had fifteen men out in various parts of 
the country soliciting the accounts that the first-mentioned 
bank was carrying, it being possible for one bank to know 
approximately who the depositors of the other banks are by 
keeping record of checks that pass through its hands. Some 
banks make this a settled policy. And by all manner of 
means such as convention attendance, advertising, service of 
various sorts, personal acquaintance, corporate connection, 
etc., deposits are sought, and secured, sometimes under 
duress. 

In soliciting a country bank's account, particular stress 
is laid upon the facilities of the city correspondent to serve 
the country bank, especially in the line of furnishing credit 
information. It will supply data regarding borrowers, buy 
paper for its correspondents, care for securities, make loans, 
collect checks on agreed terms, and render all manner of 
little services in return for the balance, and sometimes agree 
to send the bank a certain amount of business, such as collec- 
tion of notes, drafts, checks, etc., in a certain district, that 
will be a distinct profit. It is a case of one serving the 
other and the results to the city bank are shown in the 
total deposits. 

Depositors Possible Borrowers 

It is an axiom of banking that a good borrower is as 
much, if not more, benefit than a good depositor. And 
much importance attaches to the customer being a probable 
borrower. In fact, the bank wants him to borrow; it is 
profitable to both that he should. And since his borrowing 
is part of the deposit plan, it must be ascertained, in the 



60 THE PRACTICAL WORK OF A BANK 

first instance, that he is a desirable customer before he is 
allowed to open an account and on the strength thereof 
become a borrower. 

Opening an Account 

Everyone who approaches the teller of a bank of dis- 
count and expresses a desire to open an account is not re- 
ceived; first, for the reason that the bank may have rules as 
to the minimum balance. Thus, in one large bank in New 
York the rule is that a balance of at least $5,000 must be 
kept or they do not want the account. Other banks are not 
so harsh in their rules, but will generally request that a min- 
imum balance be maintained, and this is understood when 
the account is opened. It may run from $50 in a country 
bank to from $300 to $500 in city banks; but the bank de- 
sires that it shall be able to make a profit on the account, 
and by the process of analysis that will be explained in the 
chapter on analysis and cost accounting, it has been deter- 
mined that an account that does not show a certain balance 
is a loss to the bank, for to it must be charged, theoretically, 
the proportionate cost of managing the bank, rent, heat, col- 
lection costs, etc., and to it credited the interest on the 
money available for investment. And for the privilege of 
drawing checks and having the bank collect the checks de- 
posited, the bank is by all the rules of equity entitled to a 
profit. 

While the applicant's pedigree is not inquired into as 
closely in a bank of discount as in a savings bank, a proper 
identification is essential. The applicant may be introduced 
by another depositor, or someone known to the bank's offi- 
cials, but no conservative bank will open an account with 
those who do not come properly introduced. 

A card of introduction is often necessary and always 
desirable, for banks are, as a rule, not given to opening ac- 
counts with strangers. So many frauds have been prac- 
ticed upon banks by those who have, with or without intro- 
duction, opened accounts and then used the medium thus af- 
forded to work a fraud and bring loss to the bank, that 
banks in large cities, especially, now require introduction 
before laying themselves liable to frauds possible in banking 
with strangers. 



THE RECEIVING TELLER 61 

Signatures are taken on as many cards as the bank has 
departments wherein the signature will be verified. The 
officers may have one card, the tellers another and the book- 
keeping department another. In the case of corporations 



GETS $3,4 00 ON $3 4 CHECK. 

Brooklyn Police Seek Man Who 
Raised Watchman's Pay Draft. 

A forger who raised a Day check Is- 
sued by the Ocean Parkway Building 
Company from $34 to $3,400 and collect- 
ed the money is sought, by the Brook- 
lyn police. 

The check, payable to a night watch- 
man employed by the company, was 
lost in the street. The finder added two 
ciphers, opened an accoufit with a local 
trust company, and later deposited 'the 
raised check. 

On- Saturday last ttje forger -.drew \>ut 
the entire '"deposit. -The police say 
that they have a clue to—the man and 
expect to arrest htrfli.. 

THE REASON BANKS ARE LOTH TO OPEN ACCOUNTS WITH STRAN'GERS, 
AND INCIDENTALLY TO SHOAV THE RISKS OF BANKING. THE 

BANK CAN ONLY CHARGE THE MAKER THE ORIGINAL AMOUNT. 

FROM NEW YORK TIMES, DEC. 16, 1914. 

and banks, all the officers who are authorized to sign will 
affix their signatures to the cards, and the bank will some- 
times ask for a copy of the by-laws which give the corpora- 
tion's rules as to the signing of checks, together with a 
statement showing who the officers are and when elected 
and for what term, this statement being certified to by the 
secretary or officer other than the ones empowered to sign. 
After taking signature, business address, etc., a pass-book 
is made out, check-book furnished and account opened on 
the ledger. 

The Bank and its Depositors 

Eight here it may be well to stop for a time to consider 
the relation that exists as soon as the bank has thus opened 
account with a depositor. It is a settled principle of law 
that the relation between a bank and its depositors is that 
of debtor and creditor; meaning to say, the bank by accept- 
ing the account and the money and negotiable instruments 
that will be deposited from time to time, becomes the legal 
owner of the same, and simply agrees to repay the amount 
upon demand. 



m 
62 THE PRACTICAL WORK OF A BANK 

So many people have the idea that the bank is custodian 
— bailee — of the funds. They speak of having so much 
money in the bank, forgetting that they have nothing in the 
bank, but do have a credit on its books, and what they hold 
is an "account payable" of the bank. The bank in law and 
practice agrees to pay the sum on deposit to the parties and 
in the amounts ordered by the depositor, and he has the right 
to recall his orders to pay at any time prior to the actual 
payment; i. e., to "stop payment" on his checks, and this is 
frequently done. 

The Pass-Book 

The depositor's pass-book is his evidence of the deposit. 
In it are entered the deposits and sometimes the payments. 
In order that the bank may not be held liable for deposits 
entered as cash, which are in reality merely collection items, 
and to have it distinctly understood that all checks are re- 
ceived subject to collection, and only become cash when col- 
lected, many banks now have a statement in their books to 
the effect that "Checks and drafts are received and credited 
subject to the following agreement: This bank assumes no 
responsibility for the collection of checks, and reserves the 
right to withhold payment on checks drawn against uncol- 
lected funds, and reserves the right to charge back any 
checks not paid, or the remittances for them that are not re- 
ceived. The bank also reserves the right in its discretion to 
send items to the drawee bank direct for payment, and when 
so sent the above conditions are still assented to." 

Another form reads: "This bank in receiving out-of-town 
checks and other collections acts only as agent of the depos- 
itor, and does not assume any responsibility beyond due dili- 
gence, and the same care it uses in collecting its own paper." 

Still another form has it as follows: "This bank receives 
collections and deposits only on the following conditions, to 
wit : This bank shall be bound to use no more than ordinary 
diligence in endeavoring to make collection of any item left 
with it for collection or by it passed to the credit of any cus- 
tomer. It shall not be liable for the neglect or failure of the 
channels or parties to or through which such item has to be 
sent; nor shall it be liable for the returns received thereon 
until such returns have been cashed. And in case of loss on 
any item for failure to collect or failure of returns, this bank 



THE RECEIVING TELLER 



shall be entitled to charge such loss back to its customer or 
to collect the same from the customer at once." 

It frequently happens that a bank will accept a check on 
deposit on an out-of-town institution, and collection is, 



NOTICE 



This book is to be used only 
for the entry of deposits. 



A statement of the account and can- 
celled vouchers will be returned to each 
depositor on or about the first of every 
month. 

In colle cting out of town items this 
.Company assumes no responsibility be- 
yond foe e xercise of due diligence. 



Please notify us immediately of any 
change in your address. 

Guaranty Trust Company 
of New York 



NOTICE OF TERMS OK WHICH DEPOSITS ARE RECEIVED PRINTED IN THE PASS BOOK 

therefore, necessary through the mails, and before returns 
come in the collecting bank fails. The instrument may be 
correct in every respect, and no question as to its goodness 
arises ; the loss is due to the collecting agent. It would seem 
proper that the bank should charge the check back to its de- 
positor; but where no definite agreement is made as to the 
liability assumed in such matters, in some jurisdictions it is 



64 THE PRACTICAL WORK OF A BANK 

held that the bank is sort of a sub-agent in the matter and 
not agent. And in such a case, where the bank fails to make 
the collection through the fault of its correspondent, it is 
held liable. In other States it is held that in receiving an 
out-of-town check on deposit and for collection, the bank is 
agent for the depositor and the correspondent banks are its 
sub-agents, and if any of these fail before remittance is re- 
ceived, the loss is the depositor's and not the bank's provided 
it has used reasonable diligence and care in selecting 
its correspondents. 

The latter view would seem to be the most reasonable 
and fair. Depositors must know that a bank cannot guar- 
antee the collection of checks deposited. It must collect the 
same through the usual channels and depositors are bound 
to know the course of such transactions. And if the bank 
"uses care and judgment in sending the check for payment, 
no liability should attach if the chain breaks before the funds 
are in hand. 

Banks should in all cases have it plainly stated on their 
pass-books and deposit slips that they assume no liability 
until funds are received; but that the bank's position may be 
clear, notice to depositors should be given, as above noted. 

The Receiving Teller 

The individual with whom the depositor comes into con- 
tact most frequently is the receiving teller. While most of 
the checks that are drawn by depositors are paid through 
the clearing-house or through the mails, the deposits, as a 
rule, all go through the receiving teller's window, except it 
may be those made by mail, and these are not in great num- 
ber if we omit those remittances in the nature of deposits, 
but which are rather collection items, that come from corre- 
spondents, and which go through a separate department in 
the large banks. These, of course, are an important part of 
the bank's work, and constitute a very large portion of the 
liabilities in many cases, but they are not over-the-counter 
deposits such as we now have in mind. In smaller banks, 
however, the mail depcsHs go through the teller's cash. 

While the officers meet the borrowers from time to time 
the teller is apt to meet all patrons, sooner or later, and can 
do much to make his bank popular with its clients. Here 



THE RECEIVING TELLER 



65 



courtesy is a real asset. It will not do to watch the clock too 
closely, for the day's work cannot be measured by the hour. 
While a bank should close as promptly as it opens, and 
should not encourage its depositors in the habit of coming at 

HEW ACCOUNT TELLERS' RECORD CARD. 



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A CARD FOR KEEPING RECORD OF BUSINESS SECURED THROUGH FRIENDS OF THE BANK 

any time of the day and expect to find it open, there should 
be reasonable allowance for delays incident to business, an(J 
if the window has to be opened for a late comer, do it with 
a smile. 

The Teller an Important Personage 



It is apparent that the receiving teller is important in the 
role he plays. He meets the customers. It is his concern to 
treat them right; to be pleasant, yet avoid conversation. 
He must bind the customer to the bank by the quality of his 
service as he binds the bank in the acts he performs con- 
stantly. Let him, therefore, be careful. And it is to re- 
mark here that the teller shoirid so conduct himself as to 
make a good impression. He should not dress gaudily, wear 
much jewelry, or use tobacco in business hours. He should, 



66 THE PRACTICAL WORK OF A BANK 

most of all keep clean hands. In making deposits, the cus- 
tomer is very apt to watch the receiving teller closely, and 
if he is unkempt, it is quickly noticeable, and neatness is an 
asset for its own sake. And remember, that it is not neces- 
sary to wear a diamond to carry prestige. A smile will do 
as well and costs less. 

The receiving teller is sort of an educational medium. To 
him falls the duty of instructing his depositors in the proper 
method of making out tickets, endorsing checks, sorting 
money, etc., and with the cooperation of the depositors, much 
of the annoyance of badly prepared deposits may be 
avoided. 

The Work of the Receiving Teller 

The work of the receiving teller resolves itself into two 
main functions: (a) To prove the deposit ticket and re- 
ceipt for items so received; and (b) to sort the checks and 
currency into groups before turning over to other depart- 
ments. He is accountable for all funds received by him un- 
til they are surrendered. The cash which he takes in is de- 
livered to the paying teller, or to some officer who has charge 
of the cash. The checks on banks in town go to the clearing- 
house department: other items on local banks to the collec- 
tion department; the out-of-town items to the transit de- 
partment. And thus, he receives his deposits, makes his own 
records and distributes the items all over the bank, and his 
day ends as it began without cash in his drawer. 

In a small bank the receiving teller after receipting for 
the amounts in the customers' pass-books, sorts the items into 
city and foreign, and all city items that go through the 
clearing-house are listed for the clearing. Other items re- 
quiring presentation by runner are given to the department 
that has charge of collections. Items out of town are sent to 
correspondent banks. 

The teller must be particular about many things: (a) 
That his money is correct in count. The bank is responsible 
for whatever he receipts for to the depositor. A receiving 
teller at one time in a rush could not handle the crowd and 
took a deposit and laid it aside to prove later, giving the de- 
positor credit on the book. He found the cash $100 short 
and so notified the depositor, who insisted that the count was 



THE RECEIVING TELLER 67 

correct and claimed the deposit as entered — and got it. (b) 
That his money is genuine. If counterfeits creep in, and he 
cannot trace where they came from, the bank must, of 
course, lose, (c) That checks are not dated ahead, and are 
indorsed ; for while these errors might not result in loss, they 
require adjusting with the depositor and cause annoyance. 
Checks are often dated ahead, or dates are obscure or 
omitted. Often they lack previous indorsement or they are 
indorsed by an attorney without adequate proof of his au- 
thority. The sum in the body of the check may not corre- 
spond with the figures or may be entirely missing. 

In banking transactions, especially in Wall Street loans, 
it frequently becomes important to know the exact time a 
deposit was received, particularly in bankruptcy proceed- 
ings. A time stamp is often used to indicate the exact time 
a -deposit was received or a check paid, the stamp changing 
every minute. 

Good Money and Bad , .. f jj 

It is a first requisite of a receiving teller to be able to 
distinguish good money from bad; or rather bad money 
from good; and by an instinct that comes from long hand<- 
ling of money learn to know bogus money by touch. It is 
a peculiar fact and apropos to the subject to say that the 
author in an experience covering twenty years in banking 
never had the pleasure (?) of throwing out a counterfeit 
bill. It may have been due to his ignorance of bad moneys 
or it may have been due to the honesty of the patrons of 
the banks in question, yet the fact remains that in three in? 
stitutions under his observation for that length of time, no 
counterfeits were detected. 

To become an efficient teller, take }^our counterfeit de- 
tector and study page by page by comparison with genuine 
notes. Take a strong magnifying glass and examine the 
good bills; then, locate the defects on the counterfeits. Go 
from one denomination to another until the looks of the gen- 
uine bills and the weak spots of counterfeits are engraved on 
your memory. Then you know where to look for the vul- 
nerable spots whenever you handle money, and will have no 
need to scrutinize the bills as a whole. Another good prac? 
tice is to cut out all newspaper items or telegrams relating to 



«8 THE PRACTICAL WORK OF A BANK 

bad money and how banks are duped. Paste these in a con- 
venient place and read them occasionally. Experts do not 
judge so much by the appearance of a note as they do by its 
feeling, that is, by the way it slips through the fingers ; but 
it takes years of experience to acquire the necessary firm 
touch, and even then it is not always reliable. 

When notes are received that are counterfeit it is the 
duty of the receiving teller to return them to the depositor 
at once. The National Bank Act requires national banks to 
stamp or write in plain letters the words "counterfeit," "al- 
tered" or "worthless" on all fraudulent notes that come into 
their possession. There is sometimes a delicate duty to per- 
form, when the teller has to say to a depositor who has pre- 
sented a note that is fraudulent that he must stamp and re- 
turn it to him. Of course the object of so doing is to stop 
its circulation. And this is naturally unpleasant to the cus- 
tomer — but that is the law. In many cases the receiving 
teller is not so sure that the note is a counterfeit, and should 
he make a mistake, the bank would be liable for the amount. 
The error can be remedied easily by sending the note for re- 
demption stating the fact, and getting a new one from the 
Government, so that the danger of loss to a bank ought not 
to deter a teller from performing this clearly defined duty. 
In cities where there are sub-treasuries it is the general cus- 
tom to refer all doubtful money to them to pass upon. 

In receiving coin, and especially gold, one is inclined to 
be deceived by its weight.. On the Pacific Coast, where it is 
in more general use than in the East, as the loss from abra- 
sion is inevitable, the law would be unjust if every coin fall- 
ing below the standard weight was declared uncurrent. On 
the contrary, it expressly provides for the redemption of 
coins in weight within certain limits, as follows: "Any gold 
coins of the United States, if reduced in weight by natural 
abrasion, not more than one-half of one per cent, below the 
standard weight prescribed by law, after a circulation of 
twenty years, as shown by the date of coinage, and at a 
ratable proportion for any period less than twenty years, 
shall be received at their nominal value by the United States 
Treasury and its officers, under such regulations as the 
Secretary of the Treasury may prescribe, for the protection 
of the Government against fraudulent abrasion or other 
practices. * * * Any gold coin in the Treasury of the United 



THE RECEIVING TELLER 69 

States when reduced in weight by natural abrasion more 
than one-half of one per cent, below the standard weight pre- 
scribed by law, shall be recoined." Coins twenty years of 
age may, therefore, be one-half of one per cent, below the 
standard weight and still be current. A coin of light weight, 
unlike a counterfeit note, cannot be stamped "light weight" 
or with any words to indicate its imperfect character. There 
is no law permitting anyone to so mark a coin. There is a 
provision, however, which directs that "every person who 
fraudulently, by any act, way or means, defaces, imitates, 
impairs, diminishes, falsifies, scales or lightens the gold and 
silver coins which have been, or which may hereafter be, 
coined at the mints of the United States, or any foreign gold 
or silver coin which is by law made current or in actual cir- 
culation as money within the United States, shall be impris- 
oned not more than two vears and fined not more than 
$2,000." 1 

Making a Deposit 

The first thing that is required of a depositor in making 
a deposit is to make out a deposit slip. This is an original 
entry in the eyes of the law and an important document. It 
is the bank's record of what the depositor offers for deposit. 

The original tickets, after the receiving teller has finished 
with them, are passed to the bookkeeper and then filed. They 
often become exceedingly valuable for reference in case dif- 
ferences and misunderstandings occur as to credit dealings 
with depositors. All deposits received by mail must have 
prompt acknowledgment. All errors and discrepancies, if 
not discovered at the time of deposit, must be immediately 
advised by telephone, if possible, in the case of city cus- 
tomers, and otherwise by letter. 

The deposit items are separated into bills, gold, silver 
and checks, some banks requiring out-of-town checks to be 
listed separately from the local items, in order that the ex- 
change charges may be ascertained. 

In presenting a deposit the depositor should use care 
that all bills are right side up. denominations separate, the 
large bills first, and checks all properly indorsed, on the left 
hand end as the check is turned over. Silver should be 

iHorace F. Fuller, Receiving Teller, Second National Bank, Boston, before 
Boston Chapter. 



70 THE PRACTICAL WORK OF A BANK 

wrapped in standard packages, in wrappers which the bank 
will furnish. The depositor's initials should be written on 
the rolls of silver so that in case discrepancies are found they 
may be corrected. Bills in quantities should be put into 
standard packages. It is customary to strap bills in units 
of fifty bills in each package; thus, fifty ones and twos 
(sometimes thirty ones and ten twos) ; fifty fives, making a 
package of $250; fifty tens ? making $500; and fifty twen- 
ties, making $1,000. Small change is wrapped as follows: 
Pennies, 25 cents to a roll; nickels, $2; dimes, $5; quarters, 
$10; halves, $10. Gold is placed in bags of usually $1,000 
each, and strongly tied. Silver dollars are, as a rule, placed 
in bags of $100 each. Customers should follow the bank's 
methods in this. Some banks in strapping in the receiving 
cage put up odd amounts for payroll purposes, as, for in- 
stance, $125, $150, $175, etc., in fives or fives and tens. Also 
even hundreds are put up in fives and tens for quick use 
without counting when they are paid out. 

Coupons offered for deposit should be placed in coupon 
envelopes with the name of the depositor, the name of the 
company, the due date, the number and denomination, where 
payable, and total. Little attention is paid by the teller to 
the signature on checks, except checks drawn on his own 
bank, it being more important that the check be properly in- 
dorsed. He cannot know the genuineness of the signature 
on checks drawn on other banks, but can know the last in- 
dorsement. The first indorsement should be the same as on 
the face. 

Where there is any doubt regarding the instrument, par- 
ticularly as to its regularity and the probability of its being 
paid, it should be received for collection and not entered as a 
deposit. It may be "short extended," i. e., entered in the 
inside column, with memorandum that it is for collection. 

The Depositor Should Make the Ticket 

The reason banks require customers to make out their 
own tickets is to have first-hand evidence of the original 
transaction. A customer might claim to have deposited a 
certain amount, or a certain check, but when confronted with 
the deposit ticket in his own writing further proof is not 
likely to be required. 



THE RECEIVING TELLER 71 

Two cases will illustrate why the depositor should make 
his own ticket. A doctor went into a bank and offered for 
deposit a single bill, claimed to have been $1,000. The clerk, 
who had never seen a bill of that denomination, evidently 
mistook it for a $100 bill, made out a ticket, and gave the 
doctor credit accordingly. Without looking at his pass- 
book, the doctor began to check against the account and 
soon found that he had overdrawn the amount. Upon re- 
ceipt of overdraft notice he explained the transaction and 
claimed credit for the additional $900. 

The deposit slip being in the clerk's handwriting, and 
the pass-book calling for a like amount, the bank insisted 
that the doctor was mistaken, inasmuch as its cash balanced 
on that day. Suit was subsequently brought and only be- 
cause the doctor could prove he received the bill, and traced 
it from the time he received it to the bank counter, did he 
win his case. Had he made his own ticket, the error would 
not have happened. 

In another case a woman intended to send $200 for de- 
posit by her daughter. Having an extra $20, she decided 
to make it $220, but said nothing to the daughter. The 
latter handed it in as $200 ; the teller received it as $200, and 
where the $20 went is still a mystery. The woman had no 
other proof than her word, and the teller was sure it was but 
$200 when he counted it. It was embarrassing on both 
sides. 

When the receiving teller has counted the money, proven 
the checks, etc., the amount is entered in the pass-book. As 
the checks are verified by the receiving teller, a mark is made 
alongside the item to designate its class, as, for instance, "N. 
Y.," means a New York item, "34" a check on Bank No. 34 
in the clearing-house, etc. This custom, of course, varies 
with the banks. 

When a customer representing a branch house makes 
a deposit, a duplicate ticket is often presented to be stamped 
by the receiving teller, this stamp giving the date and the 
name of the bank. This is sometimes forwarded by the bank 
to the customer's head office. Care should be taken in mak- 
ing entries, as these are sometimes very important if any 
complications should arise. 



72 THE PRACTICAL WORK OF A BANK 

Checks for Deposit — Indorsements 

The items offered for deposit will be : Checks upon banks 
in the same city and clearing through the clearing-house or 
collectible by messenger within the next business day ; checks 
on out-of-town banks; coupons, requiring special care and 
registry in the mails, notes falling due, and other instru- 
ments, such as drafts upon merchants, drafts with bills of 
lading attached, etc. The latter are, of course, segregated 
and not credited, but entered for collection, either by the 
teller or by the collection clerk. The busy teller has no time 
to verify indorsements other than the last. At times 
when checks are rapidly received for deposit it is impossible 
to examine them carefully ; hence the greater need of looking 
at the indorsement of a depositor. When checks are finally 
paid by the drawee institution, errors are sure to be de- 
tected, and, of course, the bank receiving them ought always 
to know from what source they came, in order to ascertain 
what to do. Checks should be endorsed exactly as they are 
drawn. If a check is drawn to the order of "William B. 
Smith," it should be endorsed that way and not "W. B. 
Smith." If the name is wrong or wrongly spelled, then in- 
dorse as on the face of the check with the- correct name un- 
derneath. If a check is endorsed by one person for another 
under power of attorney, it should be endorsed by the princi- 
pal as by the attornej^, and the power lodged as evidence of 
that authority. 

It is permissible and often obtains, that a bank will re- 
ceive a check improperly drawn or endorsed to be passed to 
the credit of the depositor. If it goes to the credit of the de- 
positor it can only be drawn by check, properly signed, and 
so the bank is protected in accepting an irregular indorse- 
ment only if the check is for credit to the account of the de- 
positor. Checks irregularly indorsed should never be cashed, 
nor is it fair to the drawee bank to pass such checks on with- 
out calling attention to the irregularity, so that the matter 
will not be overlooked when it reaches the place of payment. 

Corporation Checks 

In dealing with corporations, the receiving teller should 
be careful to see that all checks are endorsed by the corpora- 



THE RECEIVING TELLER 73 

tion and not by an officer as such. A proper indorsement is 
"The Century Company, by James Smith, Treas.," and not 
simply "James Smith. Treas." And a receiving teller should 
never accept corporation checks for credit to personal ac- 
count. Suppose the above-named treasurer is empowered to 
endorse checks, and to draw checks. He comes in with a 
check drawn by himself, as treasurer, to his own order and 
offers the same for deposit. It should be refused. The bank 
has notice on its face that the treasurer is using if not mis- 
using the funds of the company for his personal affairs. If 
the check were signed by two other officers the case would 
be different. For this reason certain well-managed bond 
houses will not accept in payment for bonds purchased 
through them the checks of bank officers signed by them- 
selves, but request their personal check. It can, therefore, 
never be charged with knowingly accepting bank funds for 
securities sold to bank officers. 

It has been held that a bank is liable for accepting 
checks drawn by corporation officers to their own order, in 
•mch a way as to carry notice of irregularities on their face. 
Such checks are often drawn innocently and in good faith; 
but if the matter is diplomatically explained to the depositor 
he will understand. The safe way in dealing with corpora- 
tion officers is to explain the rule at the beginning, so that 
no trouble will arise on this score. Checks to the order of 
corporation officers should always be signed by one other 
than the officer interested and offering the same for deposit 
as a matter of sound banking policy. Checks drawn by one 
acting in a representative capacity and drawn to the per- 
son's order as an individual, should never be accepted with- 
out careful inquiry as to the right of the one so drawing to 
draw to his own order. Thus, an executor or administrator 
of an estate might draw to his order as an individual for ex- 
penses or other charges, and it might be perfectly proper; 
but the check has notice on its face that it is trust funds go- 
ing to an interested party and should be verified by requir- 
ing court sanction to the transaction. 

It has been held that if a check is offered for deposit in 
the same bank as drawn on, and credit given, the credit can- 
not be rescinded, as the teller has means of knowing if the 
check be good or not. Therefore, the teller should be wary 
as to how he credits checks drawn on his own bank. 



74 THE PRACTICAL WORK OF A BANK 

Third Party Indorsements 

Third party endorsements are a source of never-ending 
annoyance, except, of course, when received from depositors 
of long standing and known reliability. For the benefit of 
those who may not understand, I will explain that a third 
party endorsement is another endorsement on a check be- 
side the depositor's. If a check is drawn to the order of a 
depositor, it may be received on deposit and placed to his 
credit without endorsement of the payee without the slight- 
est danger of any question being raised as to the endorse- 
ment which the bank cannot face with impunity. The books 
will show that he got credit for it. and that he received the 
proceeds. But when the check is drawn to another or third 
party there is, first, the danger of forging; then there is 
diversion of funds, which means that the check was intended 
for one purpose and used for another. Then if the payee of 
the check is a corporation or trade name, there comes in the 
question of power to endorse on the part of the party who 
actually wrote the endorsement. 

Again, to make myself clear, I will say that power to 
sign and endorse for a corporation can only be given by the 
board of directors of that corporation. To be sure that an 
endorsement of a corporation is correct, it is necessary to 
have a copy of the resolutions of the board giving power to 
a particular officer, we will say treasurer, and a copy of the 
minutes of the meeting of the board, showing the individual 
elected to such office. These copies must be certified to un- 
der seal by one of the officers, usually the secretary. Where 
a check is drawn to the order of a trade name company, a 
certificate is necessarjr, certified by the county clerk, as a 
correct copy of the original on file in his office, showing that 
certain persons are doing business under that name. When 
a check is drawn to the order of a person deceased and en- 
dorsed by the executor, it is necessary that a surrogate's 
certificate should be had, showing who was named or ap- 
pointed as executor or administrator of the estate. If the 
check is drawn to the order of a person and endorsed by an- 
other for him it is necessary to have a power of attorney. If 
it is drawn to a corporation and endorsed by the treasurer 
and placed in his own account there may be diversion of 
funds in which the bank may be involved. I am citing all 



THE RECEIVING TELLER 75 

of the above as necessary in third party endorsements, if 
there should be a dispute over the endorsement in the future. 
Of course, in the case of a reliable depositor who is solvent 
when the check is returned, the bank simply demands the 
funds from him or charges his account. 

But some depositors are here to-day and there to-mor- 
row. If the depositor cannot be found or is insolvent the 
bank cannot charge his account. Then if a dispute arises the 
bank must have the papers mentioned above, to support its 
contention that the endorsements are good. This, of course, 
is supposing that there is no forgery involved, in which case 
no papers can save the bank. 2 

The Right Name Should be ox the Ticket 

It is important that the deposit ticket and the bank book 
which accompanies it shall be in the same name; for if the 
ticket and book are not in agreement, the ledger account and 
bank book will not tally, This is especially true where there 
is more than one depositor of the same name, as frequently 
obtains in the city banks. It is not unusual to find banks 
with two or three accounts bearing the same name, and to 
distinguish one from another numbers are sometimes given; 
and these should always appear on the ticket, so that the 
bookkeeper will not post to the wrong account. 

Not only would an error of this sort lead to trouble and 
confusion, out it might result in lawsuit and loss to the 
bank. For instance, suppose a deposit is wrongly credited, 
and the account to which it should have gone becomes over- 
drawn and the bank refuses payment on a check which 
would be good had the credit been properly made. In a 
case of unwarranted protest, the bank would be liable in 
damages if protest followed where the account was good for 
the amount. A case was recently tried in the New York 
courts where it was sought to hold a bank liable for the 
amount of a deposit wrongly credited to a depositor of a 
similar name, the one to whose account the entry was wrong- 
ly made seeking to hold the bank for the amount, on the 
ground that it had made similar mistakes before and this was 
quite likely a blunder on its part for which it should suffer. 
The claimant for the wrongly-credited deposit lost. 

2N. D. Ailing, Assistant Cashier, Irving National Bank, New York, before 
New York Chapter. 



76 THE PRACTICAL WORK OF A BANK 

In cases of wrongful credit it is sometimes difficult to 
make a correction, especially with an unscrupulous depositor, 
who, for the sake of the amount involved, would not despise 
perjury. If the teller will verify the name on the slip and 
that on the book such errors will be avoided. Of course, 
should the error be due to the depositor's neglect, another 
situation would arise: and it is entirely possible that con- 
cerns having several bank accounts, or several concerns 
working under one management, might get the pass-books 
mixed and present the wrong ticket with a book and thus 
be responsible for the error. Therefore, the name of the de- 
positor should be on the inside of the book as well as out- 
side, and the teller should see that it agrees with the ticket. 

Deposits are often made without the book, a practice 
that should not be encouraged, but is permitted because 
there seems to be no way of avoiding it. Eut subsequent en- 
tries should not be made until the book has been to the book- 
keeper and verified with the ledger and if possible the de- 
posit slip. Bookkeepers usually make such entries. 

It is the rule in many banks that only cash or its equiva- 
lent may be immediately credited to a depositor's account 
and he allowed to check against it, especially where the aver- 
age balance is not large and the depositor is working on a 
small margin. If, however, the depositor maintains a gen- 
erous balance, of course all items can go into the credit. But 
cash, exchanges for the clearing-house, which include all 
checks on banks in the same place which will be paid within 
the next business day, may be entered as cash. 

Proving the Ticket 

It is usual for the teller to check the items as he proves 
them, for only by so doing can he ascertain that all are in 
hand. It is often the case that silver is carried in the de- 
positor's pocket, and if not asked for is likely at times to be 
forgotten, and checking is the only way by which to over- 
come the tendency to forget. 

It is a very good rule for the teller to have a stated 
method of verifying the deposit slip. He should first take 
the bills, then the silver, then the checks. If he follows this 
arrangement, he will be sure to get the money, the hardest 
thing to prove he did not get if any dispute should arise. 



THE RECEIVING TELLER 77 

It is possible that a crafty clerk would devise a scheme 
to trap the unwary teller by withholding part of the deposit, 
and if not noticed pocket the funds. It is an easy matter to 
hold back a ten-dollar gold piece or a roll of silver, but if the 
items are checked in the order they appear on the slip such 
things are not likely to happen. And if a clerk were to suc- 
cessfully operate such a trick, he might easily explain that 
the money had been overlooked. 

One of the duties of the receiving teller is to collect the 
exchange charges, or deduct the same from the deposit. 
Some banks keep these records and make the charge at the 
end of a month, or half yearly, but the calculations are 
usually made in the receiving teller's department. The 
teller should be familiar with these charges. 

From the receiving teller the checks and other items go to 
the proper departments ; cash to the paying teller ; collections 
to the collection department; transit items to the transit de- 
partment ; foreign items to the foreign department ; coupons 
to the bond and coupon or collection department. The credit 
instruments may merely be sorted into checks on the deposi- 
tary bank : checks to go to New York or other reserve point, 
and collections to go to the clerk who has the mail in charge, 
and who, in small banks, is collection clerk, transit man, 
clearing-house settling clerk, and several other positions 
combined into one. 

The Machinery of Banking 

If we were to trace a check on the depositary bank from 
the receiving teller back to the depositor we would get a very 
good idea of the working machinery of a bank as respects 
the handling of a check drawn on itself. If we were to fol- 
low the route of a local check through the clearing-house we 
would get a very good idea of the clearing of checks. If we 
were to go with the messenger on his route, we would get a 
working knowledge of how a check, note or draft is collected 
by presentation over the counter of the drawee bank, or how 
an item such as a draft is collected from the drawee. 

If we were to trace a check drawn on an out-of-town 
bank from the receiving teller to the transit department, 
then through the mails, and into the bank upon which it was 
drawn, and see how payment is made, we would have a 



78 



THE PEACTICAL WORK OF A BANK 



working knowledge of bank collections; and if we were to 
trace the money we would have an idea of how paper money 
is made, issued and redeemed; and this in substance is what 
the present work proposes to do. And by reason of the fact, 





DEPOSITS 


CASH 
I RECAPITULATION 


, ■ ■ , 
CHECKS 


_....: 


























































































































































































































































































































































































































































































































CURRENCY 




































































Vault 












































































































































Counter 






































































Mutilated 




































































noi.n 
























































































































































































































































































MINOR COIN 






























































































































































































































































































































































ITEMS 




































































TOTAL C. & I. 






























































































































Cash to First Teller 


































































































































































































Cash Flush 






































































Cash Short 






































































On Hand Yesterday 


























































































































1 
















PROOF 




















































I 
















TOTALS 





















































TELLER No.™ 



TELLERS DEPARTMENT 

THE NATIONAL EXCHANGE BANK 

OF ROANOKE, VA 



TELLER S CASH SHEET 



heretofore stated, that the deposits of banks are upwards of 
ninety per cent, in checks, these are the most important 
items the bank handles. 

The Teller's Records and His Proof 



The receiving teller, as a rule, needs only two books — a 
cash book for all debit entries and accounts with other de- 



THE RECEIVING TELLER 79 

partments of the bank and a credit book for all deposits and 
letters. In addition he must have sheets for his city 
clearings and his cash items ; also proof sheets for his lots or 
blocks of credits. These proof sheets are ruled and are of a 
size to be used in the adding machines. After the teller has 
taken the cash and coin out of a deposit and substituted a 
ticket in its place, the checks and credits are given to an 
assistant to sort, following the headings printed at the top. 
The one marked "Clearing-House" means the city checks; 
the "New York" one means New York City items: the "O. 
C.'s," other checks on points which the bank's correspondents 
in and outside of New York City, and the points South and 
West cover; "sundry," points not reached by the regular 
correspondents; "cash," the tickets substituted for bills and 
coin; "own checks," checks drawn on themselves; "miscel- 
laneous," checks or drafts on brokers and checks oh banks 
that another bank may be clearing-house agent for; and 
"credits," a list of the deposits or letters. 

The three latter, after the items have been listed and 
proved on the machine, are stamped with the lot number for 
future reference. As soon as a proof is made the checks are 
immediately sent forward, except the checks on the bank 
itself, which have to be stamped with the receiving teller's 
stamp and sorted out by ledgers, and then listed on the cash 
book and turned over to the bookkeeper to whom they be- 
long. The clearing-house checks are stamped and sorted in 
racks; the New York, O. C. and sundry checks are given to 
the corresponding clerks. 

It is obvious that if the receipts are listed as they come 
in, and the items are then separated into different depart- 
ments and the departments charged with the same, the total 
of the amounts charged to departments must equal the total 
as shown by the first listing. This is the "proof" that all 
items received have been charged out and nothing has gone 
astray. This, of course, does not insure that a check which 
properly belongs in the clearing-house checks may not go to 
the transit department; but as soon as the check reaches the 
transit department it will be discovered that it is out of its 
place. 

In a small bank where the receiving and paying is done 
at the same window, and by the same man, the same proof 
cannot be had, for he handles many different transactions 



80 



THE PRACTICAL WORK OF A BANK 



and he must, therefore, work with a teller's proof sheet, 
which consists of the cash balance at the beginning of the 
day, the receipts and the payments, the result being the cash 
on hand at the close of the day. He enters receipts and 



Pot National Banks, 



TELLER'S CASH BOOK. 



DATE,,„« ,„,. 



nison & Sons. N. Y. T. C. A. Stock ] 



CASH ITEMS IN DRAWER 



Gold in Vault, 
Gold in Tray. 

Gold Certificates, 
Silver Certificates, 
Treasury Certificates, 
Silver $1 in Vault, 
Fractional Silver in Vault, 
Silver tl tnTray^ 
Silver 50c. in Tray, 
Silver 35c in Tray, 
Silver 10c in Tray, 

Total Coik, 
Legal Tender, 

Total Reserve, 
National Bank Notes, 
Nickels & Pennies in Vault, 
Nickels in Tray, 
Pennies in Tray, 
Mutilated Currency, 

Net Cash, 
Cash Items. 



Total Cask, 
Cash Over, 
Cash Short, 



Joornal Balance. 

teller's cash book 



payments as made and any error made during the day 
would show up when cash is balanced at night. As oppor- 
tunity affords the teller lists his out-of-town checks and 
charges the same to the transit department; he also lists his 
clearing-house checks and charges these to the clearing- 
house department or paying teller. The checks on his own 



THE RECEIVING TELLER 81 

bank he lists and charges to the bookkeeping department. 
He also lists the deposit tickets and charges these to the 
bookkeeping department. These lists are often in 
sheets and when bound form a permanent record 
of the receiving teller's work. As the day passes 
accumulations are treated as just shown, so that at 
the end of the day he has simply his proof to make up. 
Usually the assistant does this while the teller receives the 
deposits at the window. The totals of the checks he has 
charged out to various departments, plus the cash on hand, 
must equal the total receipts of the day as shown by his 
total of deposit tickets. When proof has been struck, his 
cash is turned over to the paying teller and the day's work 
is done. His desk is clean for another day, and to-morrow 
will be another to-day. 

The "Block" System 

The most expeditious and practical method of balancing 
the day's work in a bank is the "batch" or "block" system. 
Under this system the teller verifies the currency and 
checks off the items, but does not prove the addition of the 
ticket or examine the checks except to note that they have 
been endorsed and to calculate the exchange charges to be 
deducted from the total. 

When the checks and deposit tickets have accumulated 
sufficiently to permit a "run," they are taken by a clerk who 
sorts the checks into the several divisions or departments. 
Each division of checks is then listed upon an adding ma- 
chine, a separate total taken of each as a separate list and 
total of the cash deposited, and the amount of the exchange 
charges deducted. The lists of the two latter items are made 
up from the amounts as shown upon the deposit tickets. The 
aggregate of these totals, less the total exchange charges, 
should equal the total amount of the deposit tickets. Should 
there be a difference the work must be checked back immedi- 
ately and the error discovered, which may consist of error 
in listing on deposit ticket, or error in addition of deposit 
tickets or error in listing on the adding machine. 

The small number of items constituting a "run" permits 
immediate checking in case of error, consuming but a 
minute or so of time. When found correct, the total of each 



82 THE PRACTICAL WORK OF A BANK 

division is posted separately upon the "block" sheet under 
its proper heading and the items turned over to their re- 
spective departments. This operation is repeated as often 
as the volume of the work justifies, until the business of the 
day has ceased. 

After all deposits and items have passed out of hand, 



__ TCU.CBS- OEPABTMENT 

Co the national exchange banh YELLER OA 

^^"» Or ROANOKE. VA 




















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CHECKS FROM TELLERS 


CHECKS TO GENERAL ANO INDIVIDUAL BOOKKEEPERS AND FOREIGN DEPARTMENT 






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FIRST NATIONAL 


CITY NATIONAL 


COLONIAL 


BANK COMMERCE 










































































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CLEARING TELLER'S CASH SHEET, WHICH DISTRIBUTES THE ITEMS 



the balance sheet is then footed and a grand total is made 
of each heading, which aggregated should agree with the 
grand total of the deposit tickets, provided every "run" or 
batch has been balanced and properly listed on the balance 
sheet. This not only provides an absolute figure for amount 
of items charged to the various departments, but also pro- 
vides an absolute figure for the amount of cash (currency 
or coin) received over the counter. 

The cash upon actual count by the receiving teller him- 



THE RECEIVING TELLER 83 

self should correspond with the total amount of cash as 
shown by the balance sheet. Differences in this respect are 
only due to the teller's careless handling or inability to see 
that the proper amount of cash (currency or coin) is re- 
ceived when the deposit is made. 

In the larger banks which handle a large line of depos- 
its the work should be systematized among the teller's as- 
sistants, so that one, or if the work justifies, two, will con- 
fine their attention to checking the items on the deposit 
tickets and sort the items for a "run." The other assistant 
or assistants confine their attention to the listing and prov- 
ing of the different "runs," and posting them upon the bal- 
ance sheet. The advantage of this system is evident in that 
it detects immediately any error in the deposit ticket, pro- 
vides a proof of the actual cash (currency or coin) received, 
and balances the work as it progresses. 

The receiving teller's work is practically balanced as soon 
as the last "batch" is run off and no longer is he compelled 
to go over the footings of the deposit tickets or to check back 
each separate item, as is necessary in case of a difference 
under the obsolete system formerly in general use. 3 

A Day in the Teller's Cage 

The foregoing is a composite picture of the work of the 
receiving teller 5 gathered from many sources. The work of 
the receiving teller for a day has been fully and admirably 
covered by Mr. Horace F. Fuller, receiving teller of the 
Second National Bank of Boston, in a paper read before 
Boston Chapter, A. I. B. He says: 

"Beginning the day's work in an active city bank where 
the receiving department handles all the incoming cash 
items, the first duty is the morning mail. As soon as re- 
ceived, the letters are separated into the city or clearing- 
house letters and the foreign. The clearing-house letters are 
immediately checked off or proved on the adding machines; 
the clearing-house checks separated from the rest and 
stamped, sorted in racks and listed on the clearing-house 
sheets, and the slips proved. This is very important, as it 
must be done and down at the clearing-house at ten o'clock, 

3(3. W. Fowler, of the Trust and Deposit Co. of Onondaga, Syracuse, N. Y., 
before Syracuse Chapter, A. I. B. 



84 THE PRACTICAL WORK OF A BANK 

so a bank may have the use of the funds on that day. When 
the work is unusually heavy, it can be seen that speed and 
accuracy are required to get everything cleared up at that 
time. 

"The rest of the checks are sorted to the various places 
and listed. The credits are entered in the credit book. Then 
the receiving teller is ready for his morning settlement. He 
first enters in red ink, to distinguish them from the after- 
noon cash, the items under the various heads. Then he 
takes a total of these items from his cash book and subtracts 
the total from the total credits, and if that agrees with the 
amount obtained by subtracting the afternoon clearing from 
the total morning clearing his settlement is right and he can 
go on with the day's work, satisfied that the morning letters 
are right. 

"If wrong, the letters are first added, bills recounted 
and all comparisons gone over. If not discovered the error 
has to stand until afternoon and then the letters are re- 
checked. In the meantime some clearing-house bank may 
call up and have found the difference in checking off their 
clearing. This is adjusted by a charge or credit. 

"The foreign letters are sorted and proved by the block 
of a dozen letters or so, according to the number of checks 
they contain. The checks are then turned over to assistants 
to be sorted in their various places. The New England 
checks are generally the largest amount, as there are 640 or 
more banks represented, and these all have to be sorted in 
racks and made up on sheets and slips printed for that pur- 
pose. The New York and other checks, or checks which are 
sent to the bank's' correspondents in the various cities, and 
the sundry checks, which are on points not reached by the 
bank's correspondents, and have to be sent direct, are deliv- 
ered to the corresponding clerks. Checks on his own bank 
are sorted alphabetically and charged up to the ledgers cor- 
responding to that letter. The brokers' drafts and coupons 
not payable through the clearing-house are passed to the 
collection clerk, who sends them out with his drafts for col- 
lection. Then if the bank is clearing-house agent for any 
city bank their checks are sorted separately and charged on 
the ledgers to which they belong, and delivered to a mes- 
senger from that bank as shortly after ten o'clock as pos- 
sible. 



THE RECEIVING TELLER 85 

"For the items returned by correspondents for any irreg- 
ularity, a charge is written on a manifold book, one part 
going to the bank's customer with the item and the other 
part to the bookkeeper. This latter is charged the same as 
a check on the ledger to which it belongs. 

"Shortly after ten o'clock a list is generally received 
from the paying teller containing what is generally known 
as the clearing-house outs. These consist of checks returned 
from the New England Clearing-House protested or for 
some irregularity, and possibly New York checks which have 
been received by the clearing-house in payment of its letters. 
These latter, of course, are generally charged by request, as 
a bank may want the New York funds for remittances or 
transfers. The returned items are charged as stated above. 

"Often customers have a preference as to the way they 
want their account kept at the bank, and object to charges. 
In that case the receiving teller must call the depositor on 
the 'phone and request his check or cash in exchange for the 
returned item. Sometimes a request for a second presen- 
tation is made if returned for lack of funds. 

"It is always well to keep all returned items disposed of 
as promptly as possible. 

• "Throughout the day, as the deposits accumulate, they 
are turned over to assistants to be proved in lots, stamping 
each ticket with lot letter to correspond. The checks are dis- 
tributed as in the morning and credits entered on book. If 
during the day large amounts of bills are deposited by banks 
or corporations, these are generally charged to the paying 
teller. 

"Shortly after one o'clock in the afternoon the second 
lot of returned items are charged over by the paying teller, 
these having been returned by the city clearing-house banks. 
The process of their disposal is repeated as with the morn- 
ing ones. 

"At three o'clock the New England Clearing, which has 
in the meantime been listed on sheets and the slips provided 
for same, is totalled and comparison made with total of the 
receiving teller's cash book. It is then sent down to the 
clearing-house and a receipt taken, which is charged in on 
the following afternoon's city clearing. 

"The closing time having arrived, all deposits arriving 
late — except the larger ones which with the small ones must 



86 THE PRACTICAL WORK OF A BANK 

be carefully examined for foreign items — are held out until 
the following day. By this time there is generally quite an 
accumulation of deposits on hand, and as much speed as pos- 
sible must be used by the teller and his assistants so that the 
other departments of the bank may not be held up. 

"Having made the necessary distributions of checks and 
credits, totals are made on all the books, the bills counted, 
sorted and strapped, the coin rolled in wrappers when the 
amounts are large enough, and the cash items listed on a 
sheet. The latter generally consist of brokers' drafts of 
small amounts, coupons, and checks of banks for which the 
teller's bank is clearing agent, and generally some return 
items awaiting instructions or checks from customers, to- 
gether with small New England Clearing-House checks re- 
ceived too late for clearing. Comparison is then made with 
the departments which have been charging or crediting items 
during the day — in this case the paying teller's and collec- 
tion clerk's and discount clerk's. 

"The receiving teller then makes up his balance, which 
consists of the Boston Clearing, cash items, bills and coin, 
and proceeds to a settlement. The collection clerk has no 
debit side. This is generally the case, as his receipts of notes 
and collections are charged over and are very much larger 
than the receiving teller's debit to him. His bills and coin 
are added to the receiving teller's cash items, and so appear 
In the general bank balance. 

"The credit balance is, of course, the balance of the day 
before. The two sides are alike when a correct settlement 
is made. 

"Generally some small difference will creep in and neces- 
sitates a careful going over of the cash. The bookkeepers 
make comparisons with the debits and credits as charged to 
them and the error may turn up there. The beauty of the 
block system as opposed to the old method of checking off 
is here apparent because if there is an error, as a general 
thing it is not in the deposit or credit tickets, these all hav- 
ing been proved. 

"If there is a small difference of less than a dollar and 
it cannot be found, it is added or subtracted from the cash 
items, and the following day a debit or credit is made to 
'over' or 'short* account on the bank's ledger. Often there 
will be a difference in the city clearing due to some assistant 



THE RECEIVING TELLER 87 

not making over a blind check. This latter work must al- 
ways be insisted upon as a safeguard against incorrect work, 
as it later saves the time it might otherwise require to look 
through a large city clearing, though bright assistants will 
remember some circumstance in connection with certain 
checks, and the difference may be straightened out imme- 
diately. 

"After the receiving teller has balanced his cash and the 
book work is all finished, a copy of his balance is made out 
on a ticket and turned over to the paying teller to become a 
part of the bank's balance. In the larger banks the receiv- 
ing teller's department is divided into another department 
called the check teller's department. In this case the credits 
and checks, after the cash has been taken out and a ticket 
substituted therefor, are turned over to the check teller and 
a proof of the bills and coin is made at the end of the day 
by totaling these tickets, a duplicate of which is kept on the 
autograph register." 



CHAPTER VI. 

THE PAYING TELLER, HIS PAYMENTS AND 

HIS CASH 

I have indicated that the logical development of this 
work is to trace the items that enter the receiving teller's 
cage to their final conclusion; and inasmuch as we observed 
that all the cash was turned over to the paying teller, it fol- 
lows that this part of the banking operations comes next; for 
having brought both money funds and credit funds into the 
bank, we must get them out again, otherwise the machinery 
would become clogged. 

If we were to follow the strictly logical order taken by the 
funds received by the receiving teller, we might next consider 
how the money he receives is loaned ; but since the great ma- 
jority of loans are in the form of credits on the books, the 
consideration of the paying-out process is next in order; 
for all funds deposited are, or are intended to be, drawn 
out — not through the paying teller's window, but by a proc- 
ess that goes through the paying teller's department, name- 
ly, the clearing-house settlements, for all checks drawn on 
the bank ultimately go through the paying teller. 

The receiving teller's department is the front door — the 
great hopper into which are poured the deposits of the bank, 
and which furnish the raw material out of which it manu- 
factures credit — the finished product of banking. The pay- 
ing teller's department is the principal exit for the cash. 
The paying teller is custodian and dispenser of the bank's 
cash. It is piled high on his counter. He must have it in 
abundance. The receiving teller gets rid of it as quickly as 
possible. It is of no use to him once the count is verified. 

We can all remember the awe with which we gazed at 
the piles of bills in the bank, and wondered where it all 
came from, and what we would do if we only had part of it. 
Money in bulk always impresses the average man, as does 
anything of great value. Witness the crowds that surround 
the wagons at the Sub-Treasury in New York when they 
are unloading kegs of gold; as if to handle a keg of gold 
were more of a feat than to handle a keg of nails! 

88 



THE PAYING TELLER 89 

But to the bank teller, money comes to have a different 
meaning. It is his stock in trade; precious it may be, but 
he handles it with alacrity as the grocer handles sugar. 

Receiving Teller vs. Paying Teller 

The receiving teller does business only with the bank's 
customers; the paying teller does business with the public. 
The receiving teller has the advantage that he can check his 
work; that is, he can put it aside, even after once verifying 
it and make another proof if lie is in doubt: but the paying 
teller after paying money out cannot detect the error until 
closing time comes, and then he may simply know an error 
has been made somewhere. If the over-payment has been 
made to an honest customer, who detects it, it will be re- 
turned. 

Qualifications and Essentials or a Good Paying 

Teller 

The first essential of a good paying teller is that he shall 
keep a cool heaid and be courteous. Pie will work under 
pressure at times, and must be calm in the paying out of 
money. It must be remembered that the receiving teiler can 
only be defrauded (a) by receipting for that which he does 
not get, and this is not likely to happen often; and (b) by 
receiving bad money, and this is not frequent. But the pay- 
ing teller has many avenues for mistakes. He may pay a 
forged check; he may over pay. He may pay the wrong 
party; he may pay a post-dated check, or a stale check, or a 
raised check. He may over certify ; allow an overdraft ; and 
in many ways is taking risks all the time. But the first es- 
sential is that he shall know how to count money easily, 
gracefully and correctly, and without becoming weary. 

The teller should cultivate a memory for faces and 
names, and know the preferences of his depositors; for it is 
an act of graciousness to hand one who prefers new money 
that and nothing else. He should know counterfeits as well 
as the receiving teller, from whose cage he is quite likely to 
have graduated. And the same qualities should obtain in 
both. It is hardly necessary to say that he should be neat, 
dignified, yet friendly, of clean personal habits, for these 
qualities should be found in all bank men. 



90 



THE PRACTICAL WORK OF A BANK 



IRVING NATIONAL BANK 

NEW YORK. 

DEPOSITOR 
Name 


PAY ROLL. 


* 

Ones in packages of $25 & $50 


DOLLARS 


CENTS 








Fives" ' " 100 & 250 








, Tens " ** " 100 & 500 








Twenties " " 500 & 1000 








Large 






A 


Pennies 25 & 50c Rolls 








Nickels $1 & $2 " 








Dimes 5 " 






i 


Quarters 5 & 10 " 








Halves 5 & 10 ", 








TOTAL 








10m 43 4-14 1 



REQUISITION FOR PAY ROLL MONEY 



THE PAYING TELLER 91 

The qualifications of the paying teller are well summed 
up by a Boston teller when he says: "The paying teller 
should have the patience of Job, the wisdom of Solomon, the 
manners of a Chesterfield, the speed of an adding machine, 
and I might add the constitution of a Roosevelt." 

The Paying Teller's Duties 

The main duties of the paying teller are as follows: 
(a) To pay checks drawn on his bank and presented over 
the counter. These are presented by depositors for pocket 
cash, but most generally for payroll and other purposes 
where money payments are necessary, (b) To certify checks. 
It is quite the general custom for the paying teller to cer- 
tify checks, although in large banks there may be a special 
window for this work, and a special certification clerk, but 
the duties are incidental to the paying teller's work, since 
the certification of a check is, broadly speaking, equivalent 
to paying it. If the bank is not a member of the clearing- 
house, the paying teller will, of course, make the settlements 
with other banks. 

In addition to the above he also (c) has charge of the 
signature cards of the bank's depositors; (d) keeps a record 
of the stop payments; (e) makes shipments of currency to 
the bank's correspondents; makes up payrolls, etc. He 
makes deposits to the redemption fund in Washington, and 
through his department passes the transactions with the 
Treasury Department in regard to the issue and redemption 
of money. In some banks he also settles the clearing-house 
balances, and in some institutions examines the signatures 
and endorsements on clearing-house exchanges. 

The paying teller in the course of the day receives items 
on other banks for cashing, just as the receiving teller re- 
ceives checks on other banks for deposit and collection. There 
is no obligation on the part of a bank to cash a check on an- 
other bank, but it is done as a matter of courtesy. 

Checks when paid are usually stamped or placed on a 
special spindle that perforates in a certain manner, indi- 
cating that cash was paid on the check. Even though checks 
are "spindle cut" to show that payment has been made in 
cash, they should be stamped on the back to show the date 
of payment. 



92 



THE PRACTICAL WORK OF A BANK 





1-2 


5 


10 


20 


50 
100 


500 

1000 


TOTAL 




I Silver Certificates Old 




















\ " " New 




















Dir /Legal Tender Certificates Old 




















Res. \ ■■ •• " New 




















/Gold l * " Old 




















! " " " New 




















/silver Certificates Old 






VAULT 














New 




















Off j Legal Tender Certificates Old 




















;Res. \ " " " New 




















/Gold " " Old 




















\ " " New 




















/Silver Certificates Old 




















_l ' New 




















° ff ]Legal Tender Certificates Old 
and 1 






































R es /Gold " " Old 




















New 




















\C. H. Certificates Gold 




















Gold Certificates- Old 






VAULT 














New 




















Legal Tender Certificates Old 




















New 




















Silver Certificates Old 




















New 




















Gold Coin 




















Silver Coin 






BOX 














C. H. Certificates Gold 




















" Notes 




















Treas. . " to order 




















Gold Certificates 




















Silver Certificates 




















Silver in Trays 




















Nickels and Pennies 




















Federal Reserve C'y 




















Irving National C'y 




















Other 




















Ass't. Treas. Receipts 




















TOTAL CASH 





















LIST OF CASH ON HAND. THIS BANK KEEPS THREE RESERVES: ONE IN CHARGE OF AN 
OFFICER AND MEMBER OF COMMITTEE OF DIRECTORS ; ANOTHER IN CHARGE OF! TWO 
OFFICERS; THE THIRD IN CHARGE OF OFFICER AND TELLER. THE FIRST TWO ABE 
DISTURBED ONLY AT TIME OF AUDIT; THE LAST IS IN DAILY USE. 



THE PAYING TELLER 93 

The Paying Teller's Cash 

The paying teller originally was custodian of all the 
bank's cash, all other departments handling money turning 
the same over to him: but as banks grew in size and their 
cash holdings became larger, in many banks the cash has 
been placed in charge of one or more officers, who control all 
or part, the teller accounting to them and they supplying 
him as his needs require. 

The reserve cash is usually placed by itself in large 
bundles, added to or taken from as the counter needs and 
the needs of correspondents require. At times the teller 
has access to all cash in conjunction with an officer, or it 
may be he will have access only to his counter cash. Cus- 
toms vary. 

The paying teller should plan to have in his cage at the 
opening of business an ample supply of both bills and coin 
to meet any demand made at the counter. Of course, in 
making shipments to correspondents the supply in the vault 
may be drawn upon, but there should be such a stock in the 
cage that no customer will be obliged to wait for a trip to be 
made to the vault. The teller can soon gauge his require- 
ments, and will arrange his bills and coin in suitable quanti- 
ties to be handled rapidly without counting. 

Flat coin trays for rolled coin not only facilitate paying 
but aid in counting at the time of settlement. 

There are various coin racks for the counter, holding just 
such quantities of silver coin as are most frequently called 
for during the day, and the automatic cashiers for paying 
odd change are great time savers. 

Within the last few years a machine has been introduced 
into the banking business which, next to the adding machine, 
is the greatest time saver ever given to the teller's depart- 
ment. This is the automatic coin-rolling machine, which, 
under electric power, counts, rolls and wraps tightly and 
very speedily and accurately all classes of fractional and 
minor coin. The edges of the wrappers are tightly crimped 
like those of a paper cartridge, leaving exposed a coin on 
each end of the roll. The wrapper cannot be opened with- 
out tearing, and by rolling with the machine all coin depos- 
ited, one can avoid the predicament of a bank which found 



94 



THE PRACTICAL WORK OF A BANK 




THE PAYING TELLER 95 

in its cash some neatly measured lengths of gas pipe masque- 
rading as rolled coin. 

The teller's cash is sorted into the various classes for 
making up the reserve, for all cash cannot be held in the 
reserve ; therefore, the cash is classified and a record kept of 
the gold and silver, gold and silver certificates, legal tenders 
(greenbacks), national bank notes, clearing-house certifi- 
cates, Federal Reserve notes and the subsidiary coin. The 
various amounts are listed on the tally slip which forms part 
of his daily proof. Systematic arrangement of his money ia 
essential if he is to work quickly, as well as efficiently — 
knowing just where to find what he wants, in the form 
wanted. 

Of course, all cash is put in the vaults at night, but many 
a teller has gone back after supper to be sure he left no cash 
out, and one Boston janitor is on record as having taken a 
long trip on the money a forgetful (they are never careless) 
teller left in the drawer. 

An amusing story is told of a teller who purposely left 
all his counterfeit accumulations in the drawer — and in the 
days of the "wild cat banks" it was plentiful. One day he 
was off his post and a director took his place. Coming back 
the next day he was rebuked for his carelessness for leaving 
money in the till over night. "What did you do with the 
money you found in the drawer?" was the teller's first query. 
"Paid it out, of course," replied the director-teller. 

Many banks place the cash under two combinations, re- 
quiring two men to operate. This is along the line of the 
policy of safeguarding the bank against the possibility of a 
large loss through carelessness or dishonesty or even by ac- 
cident, such as occurred in one of our banks some thirty 
years or so ago. 

The paying teller of this bank found his cash $10,000 
short one day, and though he searched high and low he 
found no trace of the money nor any clue to its whereabouts. 
He lost his position and was for a number of years an object 
of espionage and suspicion, and, of course, suffered severely 
both mentally and financially. A number of years later, in 
making some changes in the bank's vault, $10,000 in large 
bills was found that had slipped behind or fallen beneath a 
partition of the safe in such a manner that only the recon- 
struction of the safe revealed its hiding-place. 




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THE PAYING TELLER 97 

One of the developments of modern banking is the tre- 
mendous demand for new bills which imposes an additional 
burden upon the paying teller — that of keeping an ample 
supply of all denominations of new bills and coin not only 
for his counter use, but to meet the requests of correspondent 
banks. This has had a beneficial effect upon the quality of 
the ordinary counter-money put in circulation, because the 
banks are obliged to sort their soiled and mutilated bills 
very carefully, which results in a high average of clean bills 
in daily use. 

Unfit bills are sent to the Treasurer of the United States 
in Washington or to any Sub- Treasury for redemption, and 
return as new bills, and form what is practically the only 
source of supply of new currency. These "unfit" bills, as 
they are called, must be sorted into the various kinds — gold 
or silver certificates, legal tender or Treasury notes and 
national bank notes. 

In making up packages of bills for redemption, not more 
than 100 bills, and of one denomination only, may be con- 
tained in a strap or band. Each strap must state the kind, 
denomination and number of bills enclosed, and must have 
the sender's name upon the strap. 

Only one kind of bills in multiples of $50 may be 
sent in a package, and not over 4,000 bills may be enclosed 
in one package. 

The express rate, including that for the new bills re- 
turned, is forty cents per $1,000, except for national bank 
notes for which the rate is twenty cents per $1,000. 

All bills received from the Treasury Department are in 
packages of 100, the last number of the bill number run- 
ning consecutively. Many banks have rules of their own as 
to the strapping of money, due to the trade they handle, 
and endeavor to accommodate themselves to it. Silver comes 
from the Treasury in bags of $1,000 for halves, quarters and 
dimes; nickels in bags of $200, consisting of four $50 bags; 
cents in bags of $10. The wrapping of coin has already 
been mentioned in this chapter. 

Upon the paying teller devolves the duty of filling the 
orders of correspondent banks for bills and coin. In the 
case of a bank with a large number of correspondents this is 
a daily occurrence, and the ingenuity of the paying teller is 
often taxed to comply with these requests and still maintain 




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THE PAYING TELLER 99 

an adequate supply for his counter use. It is his duty, also, 
to forward to depositors currency for their payrolls by ex- 
press or by messenger as the occasion may require. 

In shipping currency an advice of the shipment should 
always be sent by mail. The messengers should be required 
to show the express receipts for shipments, and the acknowl- 
edgment of the receipt of the cash is shown before being 
filed, all this being in the nature of a check on the trans- 
action. 

Of late, years the sharp competition for business has 
brought about a new situation for banks to meet. Some 
banks solicit from their depositors and others have thrust 
upon them payrolls to be made up individually by the bank. 
In many cases the number of employees on the payroll will 
run into the hundreds and even into thousands, and this 
work naturally belongs to the paying teller's department. 

The Clearings 

As soon as the bank opens the window work begins; but 
in some banks the window work is not the greatest part of 
the teller's duties, the inside work being of greater volume. 
As soon as the clearings arrive and have been posted to the 
ledgers they are generally turned over to the paying teller 
for verification of signatures. And inasmuch as most clear- 
ing-houses have rules regulating the time when checks that 
are not to be paid must be returned, it is essential that the 
teller have ample time in which to make his verifications. 
And the sooner he gets the clearings the better for all. He 
must know the depositors of the bank as to their handwrit- 
ing particularly, the bookkeeping department having passed 
upon the bank balance. He must know what signatures are 
required on corporation checks and how many; and who may 
draw by power of attorney. He must mind his stop pay- 
ments. The method of making clearing-house settlements 
will be found in the chapter on clearing-houses. 

One of the principal duties of the paying teller is to 
pay the clearing-house balances. If the balance is in favor 
of his bank he will receive the amount and add to his cash 
holdings; if the balance is against him, he will pay it. 
Debits in New York must be paid between twelve-thirty 
and one-thirty, and must be in clearing-house certificates 
and other large gold or legal tender certificates. 



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THE PAYING TELLER 101 

Cashing a Check 

Who has not had a check cashed? And who has not 
watched the teller quickly scrutinize it, reach for the bills, 
pass them swiftly through his hands, hand them out and 
place the check on the spindle? But what happens when you 
pass in a check and say: "Ten fives and five ones, please, 
new bills"? What are his mental processes as he pays your 
check and listens to your comment on the topic of the day? 
It looks so easy — just count money all day, and go home 
at three o'clock — or six! Nice job this! No, not a "job," but 
a position, for while he was listening to you he was glancing 
that check over. He must assure himself: First, that it 
is genuine. He might know the signature well enough to 
pass on it without reference to the signature card in the 
little drawers back of him< It might be drawn by an at- 
torney, an executor, a trustee, a guardian, an agent; and he 
must not only know that the signature is genuine, but that 
the authority is on file and in force. 

The paying teller pays a forgery at the bank's peril. He 
is bound in law to know genuine signatures. He must be a 
handwriting expert. Checks are often drawn carelessly. 
Some people can never write twice alike (and, as a matter 
of fact, no two signatures are ever exactly alike— -this being 
one test of forgery), but the characteristics are the same, 
and can easily be detected. 

Checks may be signed with gloved hands, cold hands, in 
cramped places, etc., and while genuine, are difficult to pass 
upon quickly, and the teller must not refuse a bona fide 
check, for if he does he may invite trouble. Checks of cus- 
tomers doing an active business are easily remembered; it is 
the infrequent depositor who makes reference to the signa- 
ture files necessary, as well as corporation checks where 
several officials are authorized to sign. 

Second, he must know that the check has not been 
raised. If he pays a forged check the bank is liable. If he 
pays a raised check the bank is liable for all over the original 
amount. Therefore, he must see that it is untampered with 
— sometimes a most difficult feat. 

A check may easily be altered by erasing the amount and 
figures and substituting others. This may be done very 
skillfullv with a knife or with acids. Sometimes checks are 




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THE PAYING TELLER 103 

so carelessly drawn that fraud is easy, and it is a question 
if the fraud was invited- hy carelessness. It has been held 
that a bank depositor is liable where he draws a check care- 
lessly and makes fraud easy. The use of safety paper — a 
paper with a thin coating on it which prevents any erasure 
without becoming noticeable — is becoming more and more 
common. 

Words and Figures 

Checks usually have the amount in two places, expressed 
in both words and figures. If these two are in agreement, 
there is no question as to the maker's intention as to amount; 
but if they vary, the question arises as to which controls. 
The Negotiable Instruments Law gives the following in- 
structions: "Where the sum payable is expressed in words 
and also in figures, and there is a discrepancy between the 
two, the sum denoted by the words is the sum pa}'able; but 
if the words are ambiguous or uncertain, reference may be 
had to the figures to fix the amount." 

The teller is, therefore, justified and protected in paying 
the amount expressed in words, the law recognizing the fact 
that a man is more apt to express his intentions when writ- 
ing the amount in words with deliberation than in making 
figures, although in practice it is quite likely to be the re- 
verse. Some tellers make it a rule to pay the lesser amount, 
irrespective of whether words or figures express it. 

Any erasures should be carefully investigated, for any 
material alteration will void the instrument. The use of 
safety paper is to be encouraged in this respect, inasmuch 
as any change, however slight, will readily appear. 

Third, he must see that it is not dated ahead. The 
authority of a bank to pay is only good when the date of the 
check is of the same day or an antecedent day. The teller 
must not pay a check to-day wdiich is dated to-morrow, for 
by to-morrow r the maker may put a stop order on it and can- 
cel the check. He must watch the dates. 

If the check is not dated at all the teller can be satisfied 
about that detail, for the Negotiable Instruments Law pro- 
vides that "where the instrument is not dated, it will be con- 
sidered to be dated as of the time it was issued." The teller 
can fill in the date as of the day presented, without incur- 




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THE PAYING TELLER 105 

ring responsibility, although it would seem a better practice 
tc iiave the person presenting the check attend to this. 

If the check is post-dated the teller should refuse to pay 
until the date borne by the check arrives. If he should pay 
before the date and the maker of the check suffers any dam- 
age by reason of it, the bank is liable. 

Should the check bear a date considerably previous to the 
time of presentation, it is what is known as a stale check and 
puts the teller on inquiry. As to how old a check must be 
to be considered stale, has not been decided by the law. A 
check a month old has been decided not to be stale, but one 
five months old has been so considered. The teller must de- 
cide this question after a consideration of all the facts. If 
he knows the maker and the person presenting and indors- 
ing it; if he feels certain it is all right and the maker has 
funds to pay it, he can take the chance. He should, however, 
come to this conclusion bearing clearly in mind that he is 
assuming some risk. 

Identification 

Fourth, he must know you, or you must be identified. 
The check, presuming it to be drawn by a third party to 
your order, or indorsed to your order, is payable to you, and 
payment to anyone else is unwarranted, and not good. It 
may be a bearer check, payable to holder, but most checks 
are payable to designated payees, and this one, let us sup- 
pose, is payable to you. Therefore, he must pay you or 
your order. And to identify you may be difficult. You are 
not known. You offer to bring in your chauffeur; your 
lawyer; your wife; and the teller, sad to relate, does not 
know either. You produce a letter addressed to yourself 
and say: "There, you see, I got this check in a letter this 
morning." "Yes," the teller observes, mentally, "but you 
might have stolen it from the mails. How do I know?" Of 
course, the teller doesn't say so in words, but shakes his 
head and says: "We must have someone whom we know." 
He must use judgment and tact in getting identification, 
and in the case of small checks, such matters as letters, mon- 
ograms and other documents in the bearer's possession may 
be accepted. The indorsement of one of the bank's cus- 
tomers is, of course, the best identification — if it is genuine. 



106 



THE PRACTICAL WORK OF A BANK 




THE PAYING TELLER 107 

And in being firm but kind, the teller often has to take abuse 
for being so "very particular" — "finicky," as a woman would 
put it, forgetting what the risk really is and how many losses 
and headaches tellers have had by taking a chance and losing. 

One instance will illustrate the attitude of mind of some 
people toward the paying teller. Some years ago a man 
presented for payment a check for a fairly large amount 
and had some difficulty .in producing satisfactory evidence of 
his identity. Finally, he rolled back his sleeve and showed 
his arm upon which was tattooed his full name. "There, 
young feller," he exclaimed to the teller, "do you think I 
stole the skin?" In another case a woman presented a 
check for too large an amount to take a chance on, and after 
telephoning to the drawer and getting a satisfactory identi- 
fication the teller cashed the check. As the woman took her 
money she said: "You must have a lot of crooks coming in 
here." As to telephone identification, unless the teller is 
quite familiar with the voice of the party claiming to be talk- 
ing, such identification is dangerous to accept. 

A few years ago, on a Saturday morning, the paying 
teller of a bank was called up on the telephone by a map 
representing himself to be the cashier of a corporation keep- 
ing a large account with the bank. He stated thai the clerk 
who ordinarily went to the bank was sick, and that he was 
sending a new man with a check for $1,200, which he wished 
to have cashed, and gave a full description of the man who 
would call for the money. This seemed all in good form, 
and later on a young man answering the telephone descrip- 
tion appeared at the teller's window with the described 
check. He remarked to the teller that the cashier telephoned 
about his calling for the money. Something aroused the 
teller's suspicion, and he immediately telephoned the cor- 
poration office for a confirmation and found that no such 
message or messenger had been sent. The impostor made 
his escape, leaving the check, which proved to have been 
taken from the back of the check book and the signatures 
cleverly forged. 

It is suggested that when identification is obtained it 
be in the nature of an indorsement if possible, so that in 
case of subsequent trouble the one identifying the party to 
whom payment was made may at least be located, if not 
held liable for the fraud. 



108 THE PRACTICAL WORK OF A BANK 



.191. 



TO 



IRVING NATIONAL BANK 



NEW YORK. 



PLEASE STOP PAYMENT ON OUR. 

DATED . NUMBERED 

TO THE ORDER OF 



FOR $ WHICH HAS NOT BEEN CHARGED AGAINST OUR 

ACCOUNT ON THE STATEMENT FOR ANY PREVIOUS MONTH. 

IF DUPLICATE OF ABOVE IS PRESENTED, PLEASE PAY AND CHARGE 
TO OUR ACCOUNT. 



WE UNDERSTAND THAT YOU WILL USE YOUR BEST EFFORT TO AVOID PAYMENT OF THE ITEM 
MENTIONED ABOVE. BUT AGREE NOT TO HOLD YOU LIABLE ON ACCOUNT OF PAYMENT CONTRARY 
TO THIS REQUEST SHOULD IT BE OCCASIONED THROUGH INADVERTANCE OR ACCIDENT 



SIGNATURE. 
ADDRESS, 



THIS REQUEST TO BEAR ONLY SIGNATURE AUTHORIZED ON CHECKS. 
IF ORIGINAL BE RETURNED PLEASE CANCEL THIS ORDER. 

IN ISSUING DUPLICATE CHECK PLEASE WRITE DUPLICATE ACROSS FACE OP 
CHECK OVER AUTHORIZED SIGNATURE 



STOP PAYMENT NOTICE 



THE PAYING TELLER 109 

Crossed Checks 

In England the banks have been by law relieved of re- 
sponsibility for cashing checks without identification, and an 
English teller will hand out money all day without thought 
as to whether the one standing at the window is entitled to 
the funds or not. But the English custom gives the bank 
protection in what is known as the "crossed check," which is 
merely the drawing of two parallel lines across the face of 
the check and writing "& Co." between. This, in effect, re- 
stricts the presentation of the check for payment by any 
other than a bank. And, in effect, it prohibits the party 
from collecting the check except through his bank. By act 
of Parliament a bank is prohibited from paying checks that 
are crossed over the counter. If the drawer knows the 
payee's bank, he can cross it "specially" by writing the name 
of the bank between the lines, and it can then only go 
through that channel. 

Stop Payment 

Fifth, the teller must assure himself that payment has 
not been stopped on the check. It is the maker's right to 
draw checks as often and for as much as his bank balance 
warrants; and he has the legal right to stop payment on a 
check at any time before it is actually paid; therefore, if he 
notifies the bank not to pay his check and payment is made, 
the bank cannot charge his account with the amount. These 
stop payment orders cause much confusion and give the 
tellers much concern, and are a source of annoyance; but as 
long as this is the law and the custom, it must be part of the 
teller's duties to watch out for the stop payments. It is 
one of the paying teller's duties to see that no such check 
shall be cashed by him. 

A card is made out for the paying teller's cage which has 
a space for the date, number, amount, payee's name and 
signature of the depositor, and also for the date when the 
order to stop payment was received by the bank. Below 
there are spaces to record the date of presentation for pay- 
ment, and for date of cancellation over the depositor's signa- 
ture, also for the bookkeeper's initials, to show his receipt of 
the notice. A second form is for the bookkeeper and con- 
tains the essential data of the other card. 



110 THE PRACTICAL WORK OF A BANK 

These stop-payment cards should be filed in the paying 
teller's cage in some form for instant reference. In addition, 
a visible file may be used containing the most recent stops, 
for these are the most dangerous. A check which is long 
antedated will almost surely catch the teller's eye and send 
him to his stop-payment file, for the best of memories is a 
treacherous faculty. In filling out these stop-cards the de- 
positor's signature is always to be obtained when possible. 

If the request to stop payment is received by telephone a 
confirmation by letter should be asked for, and when a stop- 
payment letter is received that fact should be noted on the 
card with the date of receipt, and the letter preserved for 
reference either in a file for that purpose or among the let- 
ters of the day. The cancellation of a stop-payment order 
should always be made over the signature of the drawer, 
either upon the card itself or by letter. These are by their 
nature a matter of record, an essential point in any trans- 
action involving the payment of money. 

Checks coming through three sources, the' paying teller, 
the clearing-house and the mails, there must be a record of a 
stop payment in each place where the check will be passed 
upon before paying. In some banks this is merely a memo- 
randum placed somewhere where the bookkeeper or teller, or 
both, can see it ; but such methods are not to be encouraged ; 
there should be order above all things. Of course, when a 
check upon which payment has been stopped is presented it 
is so marked that it cannot circulate further. A slip may be 
attached or memo made on the back, preferably the former. 
Payment may be stopped on a check by legal process. The 
law may prevent its payment. The account may be gar- 
nisheed, and if so, no checks should be paid while the process 
is effective. And in case of controversies in organizations, 
where factional fights have developed, payment may be sus- 
pended until the bank is certain of its authority to pay, es- 
pecially if it has had notice that there is irregularity in the 
election of officers or other causes of which it should take 
cognizance. If the ownership of the account is in doubt, the 
easier course is to pay the money into court and let the 
disputants settle the matter between them. 

Lastly, the teller must be certain that the drawer is good 
for the amount. In a small bank, the teller may keep his 
ledger where the cashier keeps his credit department — - 



THE PAYING TELLER 



111 



torn 17-6M-4-13-S. 

STOP PAYMENT 



Copy to all olher Tellers and 
Bookkeeper effected 



National Exchange Bank 

Roanoke, Virginia 



Check of. 



Number. 



Dated B , Amount, $. 



Payable (o.. 



Yes 



Duplicate Issued < ^ 
Memo: 



Information 

Receioed by. 



(Letter 
Authority < 'Phone Filed. 
{ Personal 



AM. 
P.M, 



Stop Payment Withdrawn. 



STOP PAYMENT CARD FILED IX TELLER S AND BOOKKEEPER S DEPARTMENTS 

"under his hat"; but in a large bank this is impossible. Of 
course, some accounts are so steady that the teller knows 
that they are never overdrawn, always good for all checks 
issued and need concern himself only that the above tests are 
met ; while other accounts are so uncertain, so generally near 
the danger line, that to make a payment without verifying 
the balance would invite an overdraft. 

Credit is a timid creature and easily shocked; and the 
credit of the maker must not be injured while the teller is 
verifying the balance. To shout out so that all in the lobby 
can hear: "Is William Smith good for fifty-five dollars?" 



Stop Payment Account of. 



STOP PAYMENT LOOSE LEAF REGISTER 



112 THE PRACTICAL WORK OF A BANK 

would do Mr. Smith an injury and certainly be undiplo- 
matic on the part of the teller. He must get the information 
In some quiet manner. In the unit system, elsewhere de- 
scribed, he can refer the check to the bookkeeper, who is near 
at hand, but in some banks, this individual is far away, it 
mav be ten stories above, and so other methods are used. 
First comes the telautograph which reproduces the hand- 
writing of the teller on a roll of paper in the other depart- 
ment. He, therefore, presses a button and writes "William 
Smith fifty-five?" 

The clerk at the other end writes back, "yes," and the 
teller pays it, and no one but the two know about the trans- 
action by wire. There is also the interior telephone, the 
pneumatic tube and messengers, but the end and aim of all 
is to get the information quietly and quickly. And becom- 
ing satisfied on all these points, he pays the money as you 
direct him, in "ten fives and five ones," spindles the check 1 
and the transaction is closed. It may have taken but a few 
seconds' time, but much has been done in that short period. 

Checks are occasionally made out in pencil, and this prac- 
tice, while rare, is sometimes bothersome. Such a check may 
be easily altered; and while the law would, no doubt, hold 
such a check good, it being nowhere said that a pencil is not 
a proper writing instrument, yet the practice is so fraught 
with danger that only small checks should be so accepted. 
The risk of the bank is great enough in any event without 
adding the temptation to easy alteration. 

Bearer Checks 

A check payable to bearer, "cash," "currency," or to a 
fictitious payee is payable to bearer and the teller may cash 
it without identification or indorsement. It is negotiable by 
delivery. But as a matter of precaution all such checks 
should be indorsed, and bearer checks should not be encour- 
aged. So far as the author has been able to determine, 
there is no case which covers the point as to whether or not 
a bank may insist upon indorsement as a requisite to cash- 
ing a check payable to bearer; but as a matter of record, to 
trace the course of the instrument and to fix the liability of 
the party, his indorsement should be obtained. A man who 

*The mutilation or cancellation is to prevent further negotiation. 



THE PAYING TELLER 113 

will not indorse a check upon which he receives payment is 
either worthy of suspicion or a stickler for conventionalities. 

Mr. William McChesney Martin of the St. Louis Fed- 
eral Reserve Bank tells of this incident: 

"An account was opened for about seven hundred dol- 
lars. When the book w T as first balanced all had been drawn 
out except about fifty dollars. Shortly after receiving his 
cancelled checks the depositor came in and claimed that some 
three hundred and fifty dollars had been paid out on forged 
checks. He exhibited these checks. They were all for small 
amounts payable to bearer, and none of them had been en- 
dorsed. Upon an investigation it seemed clear that the 
checks in question had all been signed by the depositor him- 
self, but in a disguised hand, his intention being to claim 
that they were forgeries. Every handwriting expert to 
which they were submitted came to this conclusion and detec- 
tives reported that the man was a member of a gang who 
were equal to this kind of thing. The bank refused to con- 
sider the checks forgeries and refund their amount and the 
depositor sued. In the search that was commenced for evi- 
dence, it developed that someone had handed these bearer 
checks to some mature newsboys found on the street, and 
would give them a quarter or half dollar to go in and cash 
them. The boys, however, who actually cashed the checks 
could never be found, with the result that the bank had to 
go to trial without any witnesses except handwriting ex- 
perts. The case was compromised, the bank being glad to 
get off with a partial payment of the amount claimed, 
though certain it was being imposed upon. If these bearer 
checks had contained the names of the persons presenting 
them, these persons could have been found, and the bank 
would not have been a victim of fraud. Since the experience 
of that bank, it has never cashed a bearer check without re- 
quiring the name of the person presenting it." 

The Certification of Checks 

The certification of a check being essentially payment 
(the depositor's account is charged and certified checks ac- 
count credited), and the holder being powerless to revoke 
the check after it is certified, and the bank becoming liable 
for the check as soon as it certifies, it follows that the same 



114 THE PRACTICAL WORK OF A BANK 

ceremony is necessary as obtains in paying a check; except 
that the bank need not assure itself that the holder is the 
rightful owner, for it may certify "Good when properly in- 
dorsed." The usual method is to write the words: 

Certified for $ 

Date 

Signature 

Right here let it be said that the certification stamp 
should have plenty of ink on it. So very many certifications 
are faint and hardly discernible that it must be exceedingly 
annoying to have to strain the eye to ascertain the certifica- 
tion. And where it is certified, as frequently happens, "Cer- 
tified, payable at the Blank Trust Company" — a custom 
that obtains in many large cities, where small banks will cer- 
tify through their clearing agent, a little care as to ink pads 
will be timely, and save a multitude of harsh thoughts. 

The bank is, as above stated, liable for its certification 
whether the drawer is good or not, and should only certify 
against actual balances. There was a custom, now fast 
dying out, particularly in stock exchange transactions, for 
banks to over-certify. In fact, certify to that which did not 
exist. This is against good banking principles. The bank 
would often agree to certify up to a certain amount, and 
thus become liable for the amount so certified irrespective of 
the borrower's account. One large bank in New York was 
wrecked by this practice. It is no longer in favor with good 
banks, being a loan without security. 

In certifying, a record is kept of the number and 
amount of the check, date and depositor's name and payee. 
This is generally put through by the teller in the form of 
ticket, which becomes the bookkeeper's authority to make 
the charge. When the check comes in it will be filed with 
the ticket among the vouchers. 

The general bookkeeper has a certified check rec- 
ord giving the full details, and enters the date of payment 
against the items. The balance of this account is the total 
amount of certified checks outstanding. 

In cities where stock exchange transactions are numer- 
ous, certification plays an important part in the financial 
operations and is a very important function of the teller. 
He is furnished every morning with a list of brokers and 
their morning balances. Provision is made for the entry of 



THE PAYING TELLER WIS 

deposits and checks that pass through during the day. The 
receiving teller advises the paying teller of deposits made on 
these accounts, and the paying teller enters checks certified, 
so that he has the balance always before him. As soon as the 
clearings of the day are over and charges made to the ledgers 
these amounts are deducted from the morning balance as 
shown on the sheet, so that the teller has accurate informa- 
tion all day as to the status of the broker's account. 

The payment of a debt in the form of a certified check 
does riot become effective if the bank fails before the check 
can be presented. An action would lie against the bank as 
well as against the one from whom it was received; but 
where a check is given for payment and the holder has it 
certified and the bank fails before making payment, the 
maker or indorser cannot be held, on the ground that the 
holder had the option of taking money or certification, and 
by taking the certification absolutely released the maker of 
the check. 

It is settled law that a bank does not have to certify a 
check. It can only be required to pay the money, but if it 
sees fit to assume the responsibility of certifying, it has a 
perfect right to do so. It also has a right to charge the 
drawer's account with the amount of the check, even though 
the request to certify the check is an oral direction and the 
only evidence the bank has of a proper demand is the word 
of its teller as recorded in the certified check register. 

In a Missouri case, Bank of Springfield v. The First 
National Bank of Springfield (BO Mo. App. 271), the rear 
son is well explained. The court said: "The certification of 
checks is well known to be one of the greatest dangers to the 
integrity of their funds with which banks have to contend. 
The power to certify checks, unless guarded and restrained, 
is nothing less than the power of a corrupt teller, or other 
servant, to give away the funds of the bank. Such abuses 
have been produced by the exercise of this power that pru- 
dent banks, as is well known, have generally discontinued 
the practice of certifying checks and have substituted there- 
for the practice of taking up the check tendered for certifica- 
tion and issuing in its place their own cashier's check which 
is tantamount to their own promissory note." 

It is a common practice for all New York City banks to 
certify checks. This is doubtless due to the fact that many 



116 THE PRACTICAL WORK OF A BANK 

large payments are made daily and this is the easiest way to 
handle them. Checks are also certified to a considerable ex- 
tent by banks throughout the country. In St. Louis and 
other places, however, financial institutions make it a rule 
not to certify checks, and whenever they do so are certain 
that it is impossible for their customer to transact the par- 
ticular business in hand without such accommodation. 

Another point is to guard against certifying before or 
after bank hours for any person except the drawer of the 
check. Of course a bank will accommodate a depositor by 
certifying upon his demand whenever there is a proper of- 
ficer to sign, but there is an element of danger in certifying 
before and after hours for a third party. A condition of 
affairs like this might arise: A depositor might issue a check 
after bank hours and then find that there was an error in the 
amount or that the check was fraudulently procured and 
would wish to stop payment. Relying upon the lateness of 
the hour he might notify the bank by mail to stop payment, 
knowing that the notice would be received by the bank be- 
fore it opened for business the next morning; or he might 
even telephone at the time of discovery, only to learn in 
either case that it was too late. It would doubtless result in 
loss to the bank. 

The Protection of Bank Checks 

The principal risk which a bank runs to-day is not that 
of the burglar or the sneak thief, although they are oper- 
ating everywhere, particularly in the small places; but even 
in the large cities, the sneak thief occasionally manages to 
make a good haul in broad daylight and in a bank using 
every precaution. In a recent instance in Brooklyn, $10,000 
was stolen from the cage during the noon hour, while the 
teller was for the moment disengaged. 

In 328 cases of bank frauds in a single year, all but 
twenty were cases of forgery, and the risk in banking to- 
day is that of the check forger, who either passes bogus 
checks or raised instruments. Speaking on this subject at 
various times, William J. Burns, the famous detective, has 
said: 1 

iFrom "What Burns Says," pamphlet issued by the G. W. Todd Co., of 
Rochester, N. Y. 



THE PAYING TELLER 117 

"Now, as between merely forged documents (manufac- 
tured 'out of whole cloth') and the genuine document on 
which the amount is 'raised' or altered, the danger to those 
signing and handling the altered instrument is infinitely 
greater. In fact, from some of the remarkable examples of 
'raised' checks, drafts, stock certificates and promissory 
notes that I have examined lately, it would indicate that the 
'raised' amount is more dangerous to the financial peace of 
organized society than the nitro-glycerine can of the profes- 
sional dynamiter. 

Ease of Obtaining Genuine Checks for "Raising" . 

"The methods of the forger, too, in obtaining checks 
signed by responsible men and business houses are most in- 
teresting, as showing how difficult it is to guard against the 
'check raiser.' For instance, they have developed a trick 
lately of sending a small but perfectly good check of their 
own to some business house. Then, after there has been 
plenty of time for it to be duly deposited, there follows a 
polite letter, notifying the intended victim that a mistake 
was made in sending this check, that it should have been ad- 
dressed to another house of similar name in another city, and 
will they kindly return the money? 

"In complying with this perfectly proper (?) request, 
the average business concern naturally responds by sending 
its own check for the amount to the writer of the letter, ex- 
plaining that his check had been deposited before his letter 
arrived. And this check, by the way, is invariably for a 
very small amount, as the 'check raiser' does not care to in- 
vest more actual money than is really necessary. 

"You will see that a $5 check signed by a good concern is 
just as good for his purpose as a $5,000 one, because he can 
twist the 'five' into 'five thousand' with very little trouble 
and only a drop or two of acid and another drop or two of 
ink — provided the concern has not taken the thoughtful pre- 
caution to protect its check before sending it to the polite 
stranger. (And, by the way, it is amazing how many other- 
wise conservative concerns there are in this country that will 
safeguard everything connected with their business except 
their own signatures — which represent all the rest of their 
property put together!) 

"On receiving the little genuine check, the forger then 



118 THE PRACTICAL WORK OF A BANK 

performs his interesting operation by the use of bleaching 
acids, removing the design of the paper if necessary, and re- 
storing it after the amount has been altered to suit his needs. 
He fills up perforations, or punchings, if necessary, and the 
inks of the best manufacturers are scarcely proof against his 
skill, since he can remove even printing and lithographic ink 
when necessary. Moreover, in many cases, it is not required 
to remove anything at all, as many small amounts can be 
changed by 'penning' — simply adding a few pen strokes to 
the original amount — and there you are! 

"When the alteration is finally discovered by the concern 
that issued the check, the question is, 'How are you going to 
prove the alteration? 5 Or, 'Which one of the several endors- 
ers on this check was the guilty party V It is a very difficult 
situation, and one that can rarely be cleared up to the satis- 
faction of the bank, its depositor, the correspondent banks, 
and others concerned. 

"I might mention that we have recently investigated 
cases where they managed to alter checks in such a way that 
they actually left no loophole through which to prove the 
fraud and indict them for forgery — and they accomplished 
it in somewhat the following manner: 

Cashing a "Stop Payment" Check 

"Orders had been given to a bank to stop payment on a 
certain check for a certain amount, payable to a wholesale 
house, dated on such a day, number so-and-so. It was be- 
lieved that the check had been stolen. Twice within two 
months the bank was reminded to be on the lookout for this 
check — and then, in the last hour of a busy Saturday morn- 
ing during the third month, the check slipped through. But 
the bank was not to blame. 

"The forger had first 'raised' the amount by several hun- 
dred dollars. Then he changed the number of the check, and 
brought the date right up to that very day, as though the 
check had been given to him only a few minutes previous to 
his appearance at the bank — although the check was really 
nearly four months old. Lastly, he had removed the name 
of the rightful payee (the wholesale house) and written his 
own name instead, so that he did not have to forge an in- 
dorsement. He was properly identified, indorsed the check 
with his own name, took the money — and disappeared. 



THE PAYING TELLER 119 

There was absolutely nothing of the original writing left but 
the genuine signature. How could you blame the bank? 

"Moreover, the work was so perfectly executed that it is 
doubtful if it would have been possible to prove the altera- 
tion even if the swindlers had been caught. They were not, 
for the fraud was not discovered until nearly two weeks 
later, when the signer of the check looked over his bank ac- 
count and found it short. 

"I have told you all of this in detail, so you will under- 
stand that I have a reason for the statement that it behooves 
every bank to see to it — and every business house as well — 
that all precautions are taken in making out their checks, 
regardless of the responsibility or honesty of the party to 
whom they are issued. 

"The most practical plan, I think, up to the present time 
at least, is to use a Protectograph, limiting the amount of 
the check by forcing a heavy ink into the body of the paper 
under high pressure. This limit does not leave any profit- 
able margin to pay the swindlers for their exacting work 
and the risk of punishment, so it may be considered scien- 
tific protection, and represents the highest development thus 
far in the field of anti-forgery devices. (See note page 144.) 

Advise Depositors How to Stamp Checks 

"I would suggest in using the Protectograph that the 
limit be stamped just above the signature and in close prox- 
imity to it, so that any attempt to tamper with the check 
will necessarily result in defacing the signature, which alone 
gives the check its value. 

"In New York and other cities we are constantly find- 
ing proof of the cunning employed by these crooks to gain 
their ends, and I will give you a few illustrations to show 
how difficult it is to safeguard yourself against their 
methods. 

"We will say that a band of swindlers desires to know 
what amount it will be safe to use in tampering with the 
check of a certain concern, what number to use, etc. 

"About five o'clock in the afternoon a young man calls 
at the office of the concern and states that he understands 
his employers have had complaints from the head of this 
firm about the paper furnished for its checks fading out or 



120 THE PRACTICAL WORK OF A BANK 

turning color. The head of the business has gone home and 
the bookkeeper suggests to this young man that he call the 
following day. 

"The young man then asks if he may examine some of 
the cancelled checks to see what reason there may be for the 
complaint. He asks to see some of the old checks and also 
some of the recent ones, for purposes of comparison, which 
seems reasonable, and some of the checks are produced from 
the vault. 

"By a little sleight-of-hand, which is part of his business, 
the rascal manages to abstract one of the recent checks, and 
thus goes away armed with all the working material and in- 
formation that he needs. He may utilize the old cancelled 
check by filling in the 'Paid Stamp' perforations and chang- 
ing the amounts, dates, etc. At any rate, he has possession 
of a genuine check, which is a mighty dangerous instru- 
ment in such hands. 

Sample Checks Must Be Safeguarded 

"In one case the swindlers desired to use the sample 
check merely as a 'model' from which to prepare a big 
forged check, and they managed without much trouble to 
get possession of some blank check forms of this concern, 
on which they did a very neat piece of work and secured 
about $10,000 from one of the biggest banks in New York. 

"The checks being printed specially with the name of 
the concern in peculiar type, and on a special tinted paper 
manufactured only for this particular bank, in connection 
with other circumstances surrounding the case, the deduc- 
tion was that the blank check must have come from the 
printer who made the checks for this bank. 

"I called upon the printer, and he told me that it was 
absolutely impossible for any person to secure one of these 
checks. I asked him what precaution he took for safeguard- 
ing the checks. He went to a drawer and brought out a 
large book, containing samples of the various checks he had 
printed. I asked: 'Wouldn't it be possible to get some of 
those?' He answerd: 'Oh, no!' I then told him my pur- 
pose, that I was there as a representative of the American 
Bankers Association, to determine how the forger had se- 
cured those checks, and he assured me it was absolutely im- 



THE PAYING TELLER - 121 

possible, that the checks in question must have been stolen 
from the firm or counterfeited. 

"Then I asked: 'Would it be possible to get them from 
the pressman?' "No, because we count out the sheets given 
to him, and he accounts for them.' So I asked: 'Would it 
be possible to get them from the bookbinder?' 'No,' he re- 
plied again, 'because the same method is followed with the 
bookbinder.' 

"I then pulled from my pocket ten of these checks, and 
said: 'Where do you suppose I got these?' 

"He looked at them in astonishment, and said: 'Why, I 
don't know.' 

"I said, 'Why, I just pulled them off your wall, among 
six or seven hundred other samples hanging there. You did 
not see me get them?' 

" 'Well,' he said, 'that couldn't happen but once.' 

"So I left him and went to the press room, and there 
I succeeded in finding a number of samples of checks, but 
not of this particular sort. I next called at the bookbind- 
er's, and there obtained twenty of the same identical checks, 
thrown to one side by the binder. I carried those back to 
the printer, and I said to him: 'What is the use of a bank 
taking any precaution to pay for security in printing of this 
character, when any person who wants to do so can get the 
checks at will? And moreover,' I pursued, 'the very as- 
sumed security of this work you are doing makes it all the 
more dangerous to your customers: because these checks 
are supposed to be safeguarded, and the banks generally so 
regard them, and when they get in circulation, as in this 
case, they are calculated to fool not only the banker, but 
the merchant, anywhere, because it is supposed to be im- 
possible for outsiders to get possession of such checks.' 

How Bankers Can Protect Their Depositors Against 

Check Frauds 

"These are some of the questions, gentlemen, that the 
bankers must take up for the protection of the world of 
banking and business. They must see to it, first of all, that 
the printer who prints their checks takes greater precau- 
tions toward preserving those checks from crooks. Then, in 
the next place, they must use their good offices with deposi- 



122 THE PRACTICAL WORK OF A BANK 

tors to see that they are careful as to the manner in which 
they issue their checks. 

"I do not mean that depositors can avoid giving checks 
to strangers — because the strangers will find a thousand 
ways of getting them, anyway — but they can write them in 
such a manner that they will not be a positive invitation to 
crookedness, as so many checks are at the present day." 

Educating the Depositor 

The bank owes it to itself to educate the depositor in 
the proper method of drawing checks. The raising of a 
check by a clever forger is easy. It can be made difficult, if 
not quite impossible, by these precautions which every bank 
should bring to the notice of its depositors : ( 1 ) Use safety 
paper, good ink and plenty of it. This reduces the chances 
considerably, although not entirely; (2) write the figures 
well up against the dollar sign; make the figures strong, the 
"00/00" in such a way as to leave no room for other cy- 
phers; (3) write the words in a heavy hand, beginning well 
to the left and filling all spaces with a bold wavy line; (4) 
use the best protecting device that can be found; (5) issue 
no checks to strangers; (6) balance the book with the check 
book and prove the indorsements as soon as vouchers are 
returned. By promulgating these simple rules, much loss 
and annoyance may be saved. 

It is a rule of law that the bank pays forgeries at its 
peril, and cannot be held blameless if it pays forged or raised 
instruments; but many checks are issued in such open defi- 
ance of all due precaution that it would be a manifest injus- 
tice to the bank to hold it liable for raised checks made easy 
by the careless drawing on the part of the depositor. The 
author has found no adjudicated case where the loss has 
been placed on the maker by a court of high standing; but 
it is certain that if the depositor follows the rules above laid 
down he could not be held liable; while on the other hand, 
if he invites loss to the bank it would be unjust to hold him 
harmless. 

Duty of Drawer to Exercise Care in Preparing Check 

Addendum to second edition 

It has been held in many jurisdictions that where the 

drawer or maker of a bill or note prepares it so carelessly that 

alteration may easily be made, either by insertion or erasure, 



THE PAYING TELLER 123 

without defacing the instrument or exciting the suspicion of 
a careful man, and the opportunity thus afforded is embraced 
and the instrument raised in amount, the maker or drawer 
will be liable upon it as raised to any holder in due course. 
This holding has been placed on several different grounds: 
first, that the drawer is estopped by his negligence; second, 
that where one of two innocent persons must suffer a loss 
through the wrong of a third person he shall sustain the loss 
who put it in the power of the third person to commit the 
wrong; third, that it is the duty of one issuing commercial 
paper to guard not only himself but the public as well, by 
refusing to sign an instrument in such form as to permit of 
alteration with ease and without ready detection ; and, fourth, 
that the free interchange of commercial paper requires such 
a rule. Other authorities refuse to hold to this doctrine upon 
any ground, claiming that the person who issues a negotiable 
instrument owes no duty to subsequent purchasers and that 
he is entitled to rely upon the presumption that it will not be 
criminally altered. 

But whatever may be the just rule in respect to promis- 
sory notes and ordinary bills of exchange, it is apparent that 
there is a ground on which to distinguish checks, for the rela- 
tion between a bank and its depositor is essentially different 
from that which is found to exist between the parties to a 
promissory note or ordinary bill of exchange. In regard 
to a bill or note no one is bound, in the absence of special 
agreement, to purchase it or become a party to it in any man- 
ner. But a bank is bound to honor its depositor's checks at 
its peril. Hence it is a just rule to require the depositor to 
exercise reasonable care in the preparation of his checks to the 
end that loss may not be throw r n unnecessarily upon the bank. 
Trust Co. of America v. Conklin, 65 Misc. Rep. 1, 119 N. Y. 
Supp. 367. 

In an early English decision it appeared that the plaintiff, 
having occasion to be absent from home, left with his wife 
certain checks signed by him in blank, to be filled in by her 
and used as business might require. She delivered one of 
these checks to the plaintiff's clerk to be filled in for the sum 
of fifty pounds. The clerk wrote the word fifty in the middle 
of the blank line left for that purpose and began it with a 
small letter. He showed the check to the plaintiff's wife, 
who directed him to draw the cash. Before doing so he 
raised the check to three hundred and fifty pounds, the altera- 



124 THE PRACTICAL WORK OF A BANK 

tion being rendered easy of accomplishment by the manner in 
which the check was prepared, and drew the larger sum. It 
was held in this case that the plaintiff could not recover from 
his banker the money which he claimed had been paid out 
without authority. Young v. Grote 4 Bing (Eng.) 253. 

This case was followed in a recent New York decision, in 
which it appeared that a wife signed a check which her hus- 
band had filled out for the sum of $900, leaving space which 
enabled him to raise the check to $4,900. He raised the check 
in this manner and withdrew the entire amount. In an action 
by the wife against the drawee bank it was held that the ques- 
tion whether the wife was so negligent as to preclude her from 
recovering from the bank was a matter for the determination 
of the jury. Timbel v. Garfield Nat. Bank, 121 N. Y. App. 
Div. 870, 106 N. Y. Supp. 497. 

In the opinion it was said: "The text books are quite 
unanimous in asserting that, where a drawer of a check has 
prepared his check so negligently that it can be easily altered, 
without giving the instrument a suspicious appearance and 
alterations are afterwards made, he can blame no one but him- 
self, and that in such case he cannot hold the bank liable for 
the consequences of his own negligence in that respect. 

If a check appears to have been altered the banker is put 
on inquiry as to the correctness of the alteration and he pays 
it at his own peril. Where, however, the alteration is such as 
to excite no suspicion because the check has been drawn by the 
maker in such a way as to invite an unsuspicious alteration, 
the law makes an exception to the rule that a banker pays at 
his own peril and permits him to assert negligence on the part 
of the maker in so drawing his check." 

Citing 5 Cyc. 544; Daniels on Negotiable Instruments, 
5th Ed. ? Sec. 1659; Morse on Banks and Banking, 4th Ed., 
Sec. 480; Zane on Banks and Banking, Sec. 154; Story on 
Promissory Notes, 7th Ed., 675. 

It is held, however, that while the drawer of a check may 
not recover from his banker where he draws the instrument in 
such an incomplete state as to facilitate or invite fraudulent 
alteration, he is not bound so to prepare the check that nobody 
can successfully tamper with it. (Critten v. Chemical Nat. 
Bank, 171 N. Y. 219.) (Brady, Law of Bank Checks, 157.) 

The following citations are also in point: 



THE PAYING TELLER 125 

"If by any act or negligence on the part of the drawer, 
as by so carelessly writing the check as to render it easily 
open to material alteration without leaving evident traces of 
such alteration, the customer has furnished the opportunity 
for the fraud which has deceived the bank, he must suffer 
the just consequences of his carelessness by bearing the loss 
himself." — Morse on Banks and Banking, Sec. 480; and 
Young vs. Grote, 4 Bing. 253. 

"For clearly a bank has a right to demand some duties 
from its customers, in such an important matter as protec- 
tion from fraud, in a business where frauds of a particularly 
skillful and ingenious nature are continually in course of 
perpetration." — Morse on Banks, 235. 

"The drawee can be held bound only to know the signa- 
ture of the depositor, and not the handwriting of the body 
of the check, the money paid in good faith and without neg- 
ligence on an altered check, may be recovered by the bank." 
— United States — Espey vs. Cincinnati Bank, 18 Wall 
(U.S.) 614. 

"The maker of check is bound to use recognized safe- 
guards in protecting his check against alteration, where an 
innocent holder may sustain loss." — Daniel on Negotiable 
Instruments. 

The Bank's Payroll. 

The payroll is often made up by the paying teller, or by 
an officer. This is usually done so that the employees will 
not know what each other receives. There are two sides to 
this question. It may spur a man on to know what the man 
ahead of him earns, or it may lead to jealousies as to the 
other's worth. Some banks have a payroll so that all sala- 
ries are receipted for by the men, each knowing what the 
other receives ; while others have a payroll book, in which the 
clerk simply signs for the salary for the period and no 
amount named, the amount being covered by a receipt which 
is enclosed in an envelope with no other marking than his 
name, so that he alone knows the amount. On pay day the 
envelopes are passed around, generally with new money, the 
receipts enclosed therein, to be signed and dropped in a box, 
and checked against the payroll in the book. 

One of the duties that falls to the lot of the paying teller 
is to furnish money for payroll purposes for customers ; and 
in large establishments this is a big item, and one of the 



126 THE PRACTICAL WORK OF A BANK 

principal avenues for the utilization of the bank's cash. As 
an act of courtesy to the teller, payroll money should be 
asked for as early as possible, so as to give him time to put 
it up without undue haste, and also not to keep a line wait- 
ing. If if can be furnished early in the morning, or a day 
before, so much the better. The requisition for payroll 
money is usually made on forms provided for that purpose 
indicating just the various denominations required. Some 
banks in an effort to get business have agreed to put up the 
payroll at the bank, and this is a heavy task to place upon 
the paying teller, as it involves much labor. 

The Teller's Mistakes 

The paying teller should have all due protection from 
outside interference, so that any shortages will be directly 
traceable to him and nowhere else. He should be caged, and 
the cage locked against all comers. In case of shortages, 
wljere more than one or possibly two have access to the 
funds, the question arises as to who is responsible, and if 
clerks are allowed to enter the cage abstractions might take 
place, and while small to the teller or to the bank, would 
look large to the pilferer, and might be large in their conse- 
quences. 

Where the receiving and paying is done at the same win- 
dow, notes and drafts collected, change made, and all sorts 
of transactions put through, there is more liability for error 
than where the work is specialized, and only one class of 
transactions handled. 

But whatever the cause, the error should be reported. It 
is but fair that it be so ; for if it be covered up it will surely 
lead to trouble, and any bank officer who is fair-minded, ex- 
perienced, and fit to hold his position, will understand that 
such things are liable to happen. 

An error against the bank is, as has been well said,, 
"a fight with conscience"; while if it is against the del 
positor he will hastily report it An "over," if a short pay- 
ment (to be paradoxical), will quickly rectify itself. But 
considering the amount of money handled, and the time in 
which it is handled, the wonder is that so few mistakes are 
made. 

Herein the savings bank teller has the advantage. He 
has the signature of all his depositors. He has their pedi- 



THE PAYING TELLER 127 

gree. He does not have to take chances — he can use his 
machinery. He can be reasonably certain of his payments. 
He can use due care always. 

Some banks require tellers to make good their "shorts," 
but do not permit them to retain the "overs" — a poor prac- 
tice. The principle is wrong, and all discrepancies should, 
after due search, be carried to "overs and shorts," until such 
time as the balance may be charged to profit and loss as in- 
cidental to the business. The moral punishment is sufficient,, 
and no teller is knowingly careless. 

The Paying Teller's Records and Files 

The items received by the paying teller are usually all 
debits, for he pays out. The checks drawn on his own bank 
are charged to the bookkeeping department; other checks 
are charged to the transit department. If the teller makes 
the clearing-house settlements, these checks will be held for 
the morning clearing. Having the cash balance of the day 
before, he charges himself with all receipts from the receiv- 
ing teller, and credits himself with all payments, the balance 
being the net cash on hand. If he receives from or pays to 
the clearing-house, he debits or credits himself accordingly. 

The bookkeeping in the paying teller's cage is very 
simple. He has a cash book or blotter in which are recorded 
all items passing through his cage. This book is arranged 
in columnar form, with a debit column for each teller and 
bookkeeper to whom he may have occasion to charge items, 
and a credit column for those from whom he may receive 
them. The adding machine can be used for listing and the 
slips pasted in their respective places. This will frequently 
save considerable time. The totals of the several credit col- 
umns show the cash, checks and credits to general accounts 
received from the receiving teller, note teller, and so forth, 
and the exchanges from the clearing-house. These are added 
to the previous day's balance. From this amount is taken 
the total of the various debit columns, which represent 
checks charged to the individual bookkeepers, and checks on 
other banks charged to the receiving teller or clearing-house 
or transit department, and charges against accounts on the 
general ledger. 

The balance should agree with the teller's cash and cash 



128 THE PRACTICAL WORK OF A BANK 

items. If correct it is entered in the teller's daily cash sheet, 
and with the balances of the other tellers, makes up the cash 
balance for the day. This total will balance with the gen- 
eral cash book of the bank. 

The paying teller's department has in its custody the files 
containing the signatures of customers and those authorized 
to sign on behalf of persons, co-partnerships and corpora- 
tions having accounts with the bank. These are filed in an 
orderly and readily accessible manner. The certification 
register, the teller's check list and the teller's proof book 
complete his books of entry or record. 

Signatures may be as follows: 

Individual. 

Joint — one or more persons interested in the same 
account. 

Co-partnership — signatures of either one or more part- 
ners binding a firm. 

Corporation — by officers — authorization showing officers 
empowered to sign on behalf of corporations as shown by ex- 
cerpt from by-laws or resolutions passed at meetings of di- 
rectors, and a copy of the minutes of the meeting at which 
these officers authorized to sign on behalf of the corporation 
were elected This extract or copy being signed by the sec- 
retary of the meeting and impressed with the seal of the 
corporation, is kept in files at the bank where it may be 
readily referred to. 

Banks' signature cards showing specimens of signatures 
of those authorized to sign on behalf of such banks should 
be certified to over the signature of the cashier and kept in 
signature card files. 

Power of Attorney — Signature by attorney is a signa- 
ture of a person or persons appointed to sign in the name of 
another person, company or officer of a corporation, and 
these powers should also be kept in files where they are read- 
ily accessible. Some are executed to give a limited authority, 
and others are sufficiently general in their scope to permit 
the attorney to do all of the things in connection with the 
bank account that the principal may be permitted to do. 

Agent, Manager, Special, Etc. — When signing in this 
manner the principal need not necessarily be revealed. 

Administrator, Executor, Trustee — Must be accompa- 
nied by a proper authorization, and these very titles are suf- 



THE PAYING TELLER 129 

ficient in themselves to put the banker upon notice that 
proper authorization is required. 

The Certification Register — The teller's check list, and 
the teller's proof book admit of a range from which a selec- 
tion may be made from a number of good forms to suit the 
requirements and needs of each bank according to the size 
of the bank, the arrangement of the department or the size 
of the community in which the bank is located. 2 

What I Do by Another I Do by Myself 

What a man may do by himself he may do by his agent ; 
and the acts of the agent within the scope of his authority 
are the acts of the principal; therefore, a depositor in a bank 
may delegate his right to draw upon the bank by proper 
authority, which is most frequently by power of attorney. 
This may be limited or unlimited, and includes, as a rule, 
the right to indorse. The right to indorse only may be 
given, but the right to indorse does not include the right to 
draw checks. The power must be in writing, explicit, and 
cover the ground fully, so that the bank will know that the 
agent or attorney has exact powers and what they are. 
Such signatures should always be in the form: "A, by B, at- 
torney," and not simply "B, attorney, agent, etc." A knowl- 
edge of the law of agency is here applicable and the teller 
should know how far the principal is liable and how far the 
agent, and see that in the acts authorized the agent binds 
the principal and not himself. Sometimes he binds neither. 

The death of the drawer of a check revokes his order and 
the teller is charged with notice not to pay as soon as knowl- 
edge of the maker's death is received. 

The Money Teller 

Having considered the paying teller's department from 
the standpoint of the average teller in the average bank, let 
us look at another phase of the subject, that of the paying 
teller in the large bank, say, with deposits of $60,000,000 to 
$100,000,000 or more. 

In a bank of this size the first paying teller needs to give 

2Henry Billman, Cashier North Side Bank of Brooklyn, before New York 
Chapter. 



130 THE PRACTICAL WORK OF A BANK 

all his time to the care and distribution of the bank's cash, 
leaving to the other tellers the paying of checks, waiting 
upon depositors and all other details of the department. 

He will have under his charge a cash balance varying 
from $5,000,000 to $15,000,000 of actual money. The larger 
the institution the greater will be the fluctuations in the 
bank's holdings of cash. This money comes into the bank 
from two sources, the greater part of the bills of the smaller 
denominations being deposited with the receiving tellers, 
while those of large denominations come from clearing-house 
balances and the Sub -Treasury. The small bills are depos- 
ited in sums varying from a few dollars from individual de- 
positors up to great bundles brought in by large corpora- 
tions, railroads and from correspondent banks. The loose 
bills are verified by the receiving tellers and sorted into the 
tills to be made up into packages as soon as time permits. 

It is customary for banks to furnish their depositors 
with bill straps, with printed spaces for the amount, the de- 
positor's name and date of deposit. During the day these 
bills are sent to the bill teller's department in their original 
wrappers. In a large bank it is not an uncommon occur- 
rence to receive as large a sum as $700,000 in a day, and the 
hill teller's department in such a bank is a busy one. 

In this department there may be fifteen to twenty bill 
counters, whose duty it is to verify all these various pack- 
ages of currency, to cull out the unfit bills, and to sort and 
arrange the good bills in form suitable for use at the pay- 
ing teller's windows and for shipment to correspondent 
banks. An average of from thirty to forty per cent, of cur- 
rency so deposited is unfit for circulation. 

These bills are counted so that ones and twos are in $100 
straps; fives in $500 straps; tens in $1,000 straps, and twen- 
ties in $2,000 straps, the straps being of different colors that 
they may be readily distinguished. At the close of the day 
the even packages are sent to the paying teller, the odd 
amounts and unverified packages remaining with the bill 
teller, who keeps a debit and credit account with the paying 
and receiving tellers. 

With this amount of cash it is extremely important that 
it shall be stored in the vault in such shape that it may be 
readily verified. Uniform sized bundles of the different de- 
nominations may be made up containing twenty packages 



THE PAYING TELLER 131 

each of the various denominations, so that each bundle of 
ones and twos would contain $2,000, the fives would be in a 
$10,000 bundle and the tens in a $20,000 bundle, the differ- 
ent colored straps instantly indicating the denomination. 
Then each denomination being stored by itself it is a mat- 
ter of a very short time to verify a large balance of cash. 

For the purpose of having an accurate record of this 
cash a vault book is kept showing the actual amount of each 
denomination. The daily changes are recorded by a debit 
and credit account in the vault book, charging the vault with 
such amounts as are put in, and crediting it with amounts 
withdrawn, striking a balance at the close of the day; then, 
as the vault total is entered as one item on the teller's settle- 
ment, any error or omission is bound to show in the settle- 
ment. 

The bills of the larger denominations, excepting national 
bank notes, form the greater part of the bank's reserve 
against deposit liability, and are practically all gold cer- 
tificates, fifties, one hundreds, five hundreds, one thousands, 
five thousands and ten thousands. The fifties and one hun- 
dreds are usually counted into packages of $5,000 each, and 
*he larger denominations into such sized packages as is most 
convenient to the teller, an accurate record of which is also 
kept in the vault book. 

A few of the largest banks, by an arrangement with the 
Treasury Department, and a large number of country banks, 
receive directly from Washington all the new currency is- 
sued to those banks to replace their unfit bills which have 
been destroyed. This amounts to a very large sum in the 
course of a year, and adds very materially to the large 
bank's supply of new bills. 

The large bank maintains a completely equipped print- 
ing office which prints upon the bills the signatures of the 
respective officers and cuts and trims the sheets of bills. Re- 
cently in one of our largest banks 20,000 bills were pre- 
pared for circulation in less than two days. 

A surprisingly large amount of fractional currency is 
used daily in a large bank, it not being an uncommon oc- 
currence to pay out $.50,000 in a day. This fractional cur- 
rency is rolled and packed in heavy, flat, tin trays holding 
one layer of coin, and is stacked up in the vault, each de- 



THE PRACTICAL WORK OF A BANK 
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nomination by itself, in the same manner as the bills, and a 
similar record kept in the vault book. 

Financial affairs are so susceptible to conditions the 
world over that while to-day the banks may have a surplus 
supply of cash some untoward happening might start to- 
morrow a demand which would exhaust the supply of every 
bank in a fortnight. Such was the situation in 1907 when 
bills sold at a premium of four dollars per thousand. 

The value of a large bank was well demonstrated at that 
time, for during the three months of the currency stringency 
one of our largest banks collected $13,000,000 in small bills, 
and besides taking care of their own depositors distributed 
them from Maine to California where they were the most 



THE PAYING TELLER 133 

needed, and that without paying or charging a cent of 
premium. 

During certain seasons of the year currency flows into 
the city banks in large volume, and then at other seasons 
the tide turns and the flow is all outward. It is the duty of 
the paying teller to anticipate these seasonable movements 
of money and to accumulate or distribute his cash as the 
case may require. It is much easier to relieve a surplus than 
a shortage. 

Every department of a large bank is an almost inde- 
pendent organization. The executive officers, being occu- 
pied with their own duties, must depend upon the heads of 
these departments for details; so it is necessary that the 
paying teller's records shall enable him to answer promptly 
and accurately any question concerning the bank's cash. 

The daily routine of the first paying teller may follow 
somewhat upon these lines : Long before the bank opens for 
business he has received and filled the requisitions for bills 
and coin from the other paying tellers, perhaps from $200,- 
000 to $400,000 each, according to the day of the week or 
season of the year. Then the requests from correspondent 
banks are made up and sent to the express companies. In a 
year of good business the banks in manufacturing centers 
make heavy demands for currency for payrolls. Between 
nine and ten o'clock the brokers' clerks bring in their checks 
for certification, and in an active stock market these cer- 
tifications will run into the hundreds daily. At ten o'clock 
the Sub-Treasury opens for business, and large deposits 
are made daily, on account of the five per cent, funds of 
correspondent banks, for shipments of silver, transfer of 
funds, etc.; and so through the day constant demands are 
made upon the paying teller until the closing hour, and 
then if remittances are very large and New York funds are 
scarce and at a premium he may have to ship $1,000,000 in 
small bills to a dozen New York correspondents. 

The duty of caring for such large sums of cash and of 
anticipating the needs of the future call for good judgment, 
ability, experience, energy and integrit}'. 3 

3From an address delivered by Mr. E. W. Jones, paying teller of National 
Shawmut Bank before Boston Chapter, A. I. B., Nov. 19, 1912. 



134 THE PRACTICAL WORK OF A BANK 

Figuring the Reserve 

One of the features that distinguishes European from 
American banking methods is the reserve. In Europe the 
reserve is optional, while in this country it is obligatory. In 
European countries no reserve is stipulated by law, the 
banks being left to themselves in this matter, to carry as 
much or as little as the occasion requires. The Bank of 
England has had as low as fourteen per cent, and as high 
as fifty-seven. The Bank of France sometimes has as high 
as seventy-five per cent., but in the United States the re- 
serve requirements have never been over twenty-five per 
cent, for reserve and central reserve cities and less in other 
places, although banks have carried as high as fifty per cent, 
at times. 

There is no uniformity in this country except under the 
Federal Reserve Act, which specifies the reserve that must 
be carried by all member banks. State banks and trust 
companies which are not members are subject to State laws 
and in these there is no uniformity. The reserve, however, 
is always larger in the large cities than in country districts, 
and the reserve on time deposits smaller than on demand 
deposits. 

The lawful reserve of a bank consists of its balances with 
reserve agents and its money holdings of such character as 
the law stipulates shall constitute reserves, which in the 
National Banking System does not include national bank 
notes, although State banks and trust companies are per- 
mitted to count such notes in their reserves. 

The statement of condition is for two purposes: (a) To 
ascertain the condition of the bank, and (b) to afford a 
basis for figuring the reserve, for until the liabilities are 
known the reserve requirements cannot be ascertained. The 
reserve requirements of the Federal Reserve Act, summar- 
ized, are as follows: 



Country Banks 

12% of demand 

and 

5% of time 

deposits, 

of which ± 



4/12 — In own vaults (for first 3 years 5/12). 

5/12 — In Federal Reserve Bank of home district (2/12 

for first year, and 1/12 for each succeeding 6 

months up to 5/12). 
3/12 — In own vault or in Federal Reserve Bank (for 3 

years this may be held in own vault, in Federal 

Reserve Bank, or with reserve agent as at 

present). 



Reserve City 

Banks 

15% of demand 

and 

5% of time 

deposits, 

of which 

Central Reserve 

City Banks 

18% of demand 

and 

5% of time 

deposits, 

of which 



THE PAYING TELLER 135 

5/15— In own vault (for first 3 years 6/15). 

6/15— In Federal Reserve Bank (3/15 for first year and 

1/15 for each succeeding 6 months up to 6/15). 
4/15 — In own vault or in Federal Reserve Bank 

(for 3 years this may be held in own vault, in 

Federal Reserve Bank or in national banks in 

central reserve cities). 



6/18 — In own vault. 

7/18 — In Federal Reserve Bank. 

5/18 — In own vault or Federal Reserve Bank. 



JDemand deposits are those payable within 30 days; time deposits those pay- 
able after 30 days and those subject to not less than 30 days' notice. 

Federal Reserve Banks may receive, as one-half of each installment of 
reserve, paper acceptable for rediscount. 

Reserve funds in Federal Reserve Banks may be checked against to meet 
existing liabilities, but reserve must be restored before new loans or dividends 
can be made or declared. 

Section in former law providing that 5% redemption fund be considered part 
of reserve is repealed. 

No member bank shall keep on deposit with a non-member bank more than 
10% of its own capital and surplus, except where State laws specify that reserves 
of State Banks shall or may be kept with State Institutions. Deposits so kept, 
for a period of three years after organization of Federal Reserve Bank of 
District, shall be considered as reserve deposits with proper reserve agent.s 

For present purposes we are concerned, in the main, as 
to how the reserve is computed, for it includes various items 
and excludes others. The calculation of the bank's reserve 
in national banks is as follows : 

For banks outside reserve and central reserve cities add 
the following: Due to approved reserve agents. Due to 
banks other than Federal Reserve Banks. 

Deduct: Due from banks other than Federal Reserve 
Banks or reserve agents. 

Should the aggregate of amounts due from banks ex- 
ceed the amount due to banks, both must be omitted, since 
it is an asset and not a liability. 

Add to the above: Dividends unpaid; individual depos- 
its (demand) ; five-twelfths of time deposits (for first twelve 
months after date of organization of Federal Reserve 
Bank). 

Deduct: Checks on other banks in the same place; ex- 
changes for the clearing-house. Twelve per cent, of this 
amount is the reserve required. 

« Pamphlet issued by the Guaranty Trust Co. of New York. 



136 THE PRACTICAL WORK OF A BANK 

Items composing the reserve are: Balances with ap- 
proved reserve agents; balance with Federal Reserve Bank; 
fractional silver; silver dollars; silver Treasury certificates; 
gold coin; gold Treasury certificates; legal tender notes 
(greenbacks) : gold certificates payable to order; clearing- 
house certificates. National bank notes are not permitted to 
be held except in State banks and trust companies. 

It follows, as stated elsewhere, that the bank must keep 
its money separated for reserve computations, and this is 
usually done by keeping most of the reserve by itself in a 
separate compartment. A study of the appended form used 
in computing reserves in member banks in the Federal Re- 
serve System will be helpful and explain the process fully. 

The Unit System 

Banking principles are the same, whether it be in a fifty- 
million-dollar bank or in a modest hundred-thousand-dollar 
institution in some small hamlet where the cashier is the 
whole bank, knows everybody and everybody's business, 
whose credit department is "under his hat" and whose identi- 
fication book is his knowledge of the people of the town. 
He may open the bank, build the fire, get the mail, answer 
letters, attend at the window and the board meetings, and 
be the whole bank in himself; and the modern bank, with its 
vast and seemingly complex organization, is but the evolu- 
tion of this one-man institution. 

No matter how large or how small a bank may be, the 
work divides itself into three departments, the executive, the 
teller's and the accounting. And every detail of the work 
must come under one of these classifications. If a letter 
comes in with collection items, it- is the teller's work to prove 
the listing, and the accounting department's function to 
record and acknowledge. It may not be the money teller or 
a designated mail teller, but it is teller's work, nevertheless. 
If new men are to be employed, it is executive work. If a 
letter of inquiry comes in, it may be part of the accounting 
function to get the facts for the executive's information. 
These functions lock and interlock, so that it may seem com- 
plex in a large bank, and exceedingly simple in a small one ; 
but the only difference is in the degree and not in the kind 
of work involved. One man may perform all three func- 



THE PAYING TELLER 137 

tions, or only one ; but the same work must be done in every 
bank whether it handles millions or only thousands. 

These functions, of course, are closely allied, the one be- 
ing dependent upon the other. The work may be highly de- 
partmentized as in large city banks, or done by one man 
who is executive, teller and clerk. But by reason of the in- 
dependence, to a certain extent of each department, it may 
be segregated and perform most of its functions alone, being 
united to the others through the executive and supervising 
departments. And as one department may be separated 
so two may be, and the unit system contemplates taking the 
teller's and the bookkeeper's work and uniting them into a 
little bank, completely equipped to handle the depositor's 
business in all things except the granting of loans. 

As the business of banking grew in popularity and vol- 
ume, new ways and methods were devised to meet the in- 
creasing demands, first, by adding more men to the force, 
and then by departmentizing the work, so that each man 
had his special work to do, and all dovetailed together. In- 
timacy could no longer be the rule and machinery had to 
take the place of personality, and the personal equation no 
longer obtained. The most logical development was to di- 
vide the work of the tellers and bookkeepers into sections, 
preferably by alphabetical arrangement. By this method 
the tellers became acquainted only with depositors in their 
section. For instance, the tellers in the A, B and C window 
never met the depositors in F, G and H. There was thus 
lost that personal contact with all depositors that is so de- 
sirable in banking. As a solution of the difficulty, and to 
expedite the work, we have the unit system, by which the 
work of paying and receiving is done at the same window. 
The author found this system in use in Canada a few years 
ago, but the credit for introducing it in this country be- 
longs to Mr. Stoddard Jess, vice-president of the First 
National Bank of Los Angeles. The depositors are classi- 
fied according to alphabet, and the work of receiving, pay- 
ing and bookkeeping for each group is done as a unit. The 
window work is performed by as many tellers as necessary, 
and in close proximity are the bookkeepers and statement 
clerks, so that the whole work of caring for the current 
needs of a group of depositors is performed in a limited area 
and each is complete in itself. 



138 THE PRACTICAL WORK OF A BANK 

Numerous banks throughout the country have used this 
system with satisfaction, particularly the Irving National 
Bank of New York, the First National Bank of Denver, 
Colorado, and others. It is especially adapted to banks hav- 
ing a large counter trade, but does not work so well where 
the bulk of the transactions are through the clearing-house 
or by mail. Moreover, the equipment must be arranged for 
such work, and in building new buildings this system is often 
introduced. 

In such a system there must be a controlling account to 
assemble and prove the figures of all the units, the latter 
turning over to this head unit, or chief bookkeeper, all ex- 
cess cash, and obtaining from him all supplies of money. 
Both deposits and withdrawals being handled at the same 
window, there is a movement of money both ways, so that 
only net cash is dealt with. There is, of course, liability of 
confusion due to handling two kinds of work, which did not 
obtain under the old system of segregating the work into 
receiving and paying departments. 

In a Chicago bank the accounts are divided into groups, 
but the receiving and paying is done by different men. In 
this bank each unit is complete in itself, inasmuch as the 
customer can make deposits, cash checks, and obtain certifi- 
cations, statements, vouchers and stationery at the same 
window. 

The unit tellers' system was devised by the First Na- 
tional Bank of Los Angeles, Cal., to meet the growing 
needs of the bank due to the increasing business with de- 
positors, which was caused by the growth of the bank in 
popularity, and by taking over other institutions. The prob- 
lem was to take care of about 15,000 open accounts, requir- 
ing forty individual ledgers. The result was the bank was 
divided up into several little banks, as a department store is 
composed of several smaller stores, each complete up to a 
certain point, and this is the key to the unit system. Mr. 
Stoddard Jess, who devised the system tells how he intro- 
duced the idea in the bank, from which it has spread to sev- 
eral other banks with like problems. Writing in "The 
Bankers Magazine," he said: 

"In the spring of 1905 the First National Bank of Los 
Angeles had about eight thousand accounts with individual 
depositors on its books, the business being handled by three 



THE PAYING TELLER 139 

receiving and two paying tellers in rather an unsatisfactory 
manner, for the reason that notwithstanding the fact that 
the work was divided alphabetically among the tellers, still 
the number of depositors presenting themselves at each pay- 
ing teller's window was about four thousand — too large a 
number for the tellers to know personally. Another diffi- 
culty seemed to be that at certain hours of the day the pay- 
ing tellers were kept very busy while the receiving tellers 
had but little to do; again, at other times and particularly 
just before the closing hour, long lines would form before 
the receiving tellers' windows, and business in the paying 
tellers' cages would be slack. Just at this time, and with 
these conditions existing, it was decreed that the First Na- 
tional Bank should take over the business of two other na- 
tional banks in the city, with nearly seven thousand addition- 
al accounts. The problem this brought was how to arrange 
to care for nearly fifteen thousand accounts requiring forty 
individual ledgers to hold them in a manner to give satis- 
factory service to the depositors. 

"At some time in my life I picked up the idea that if 
anything was too large to handle as an entirety, the proper 
solution was to reduce it into parts; and recognizing the 
successful application of this principle in the organization 
of the modern department store, which is nothing more than 
an aggregation of small stores and up to a certain point un- 
der separate control and management, I asked myself the 
question, Why not divide the bank up into a number of small 
banks, in alphabetical sub-divisions, each to have its own 
clientage and each to be under the control of one teller who 
should receive as well as pay and who should have an assist- 
ant to do such work as the teller might see fit to turn over 
to him — thus following out the methods of the smallest 
country bank. 

"While this plan recommended itself theoretically, and 
seemed to offer a satisfactory solution of the problem, it was 
such an innovation in the field of commercial banking that it 
was with some hesitation that I advanced the idea. Our 
tellers unanimously pronounced it entirely impracticable for 
them to both pay and receive. Not believing their position 
to be well taken, having performed the same duties in a 
country bank myself, I concluded to make the innovation 
and give the scheme a trial. To do this required a change in 



140 THE PRACTICAL WORK OF A BANK 

the construction of the counter line. I arranged to divide 
the bank, as it were, into nine small banks — one for lady 
customers exclusively, and eight according to the following 
sub-divisions of the alphabet: A-B, C-D, E-G, H-K, L-M, 
N-R, S, T-Z. 

"In carrying out the plan, eight cages were constructed 
on one side of the bank, the ladies' department being re- 
moved for convenience to another location; each cage of the 
same size, nine feet long and six feet wide, with two win- 
dows in each at the counter line, one marked 'Teller' and 
one 'Assistant,' with a compartment back of each cage four 
and one-half feet wide by nine feet long, for a bookkeeper 
to handle the detailed ledger containing the accounts of the 
depositors whose names commenced with the letters on the 
front of the cage. 

"In the working out of the system the amount of cash 
necessary, and to be adjusted from time to time, is given 
into the custody of each teller to remain in his possession and 
under his control, a coin truck being provided for each, 
which is locked and wheeled into the coin vault at night and 
taken out each morning by the teller and placed in the cage 
under the counter in a place provided for it between the 
teller's and assistant's windows. Both the teller and his 
assistant handle the cash, and at the close of the day's work 
both are required to count it and initial the teller's sheet 
which is turned into the auditor. It is made the duty of the 
auditor to count the cash in the possession of each teller at 
irregular intervals, not more than six days apart, and turn 
in a report of his findings to the cashier. 

"The object of having the bookkeeper immediately be- 
hind the cage is for the convenience of the teller or his as- 
sistant in securing information in regard to the condition of 
the depositor's account. 

"The objects gained by the system are: 

"First — Retaining the personal equation between the 
teller and his customer. By dividing the alphabet so that 
all customers whose names begin with A-B, etc., transact 
their business at one cage, it makes a clientage for each cage 
of from 1,500 to 1,700 depositors, a number that it is entire- 
ly possible for the teller to know personally, giving the teller 
the advantage of being able to call his customer by name 
and to become acquainted with the standing of the depositor 



THE PAYING TELLER 141 

and the character of his account, allowing the teller to render 
better and prompter service than would otherwise be 
possible. 

"Second — The system properly handled prevents the for- 
mation of long lines before the tellers' windows, thus ex- 
pediting the transactions of business and preventing con- 
gestion in the lobby. All customers fall in line in front of 
the teller's window. The duty of the assistant is only to do 
such things as the teller may direct and not take any busi- 
ness on his own initiative. When a customer presents 
himself at the teller's window desiring an assortment of 
change to make up a payroll, or with a long list of items on 
a deposit slip to check up, transactions that take time and 
so impede the progress of the line, the teller passes the trans- 
action over to his assistant and requests the customer to fall 
back to the assistant's window and receive his payroll or his 
pass-book containing the proper credit entry. If the teller 
uses discretion in handling the business as indicated, it re- 
sults in the formation of two lines — one a fast-moving line 
in front of the teller's window, and, when necessary, a slow* 
moving line at the assistant's window, each customer in 
which, if kept waiting, keeps somebody else waiting in turn 
and consequently has no just cause of complaint. 

"Third — The advantage to the customer in allowing him 
to transact all of his business with one teller at one window. 
The depositor that desires to cash a check as well as make his 
deposit appreciates the opportunity of being able to do both 
at one window rather than to be obliged to work his way up 
in line to a receiving teller's window and then fall back and 
work his way up again in a line to the paying teller's 
window. 

"After a trial of over a year and a half, all our tellers 
are convinced that the method is entirely feasible and say 
that they cannot see how the same volume of business could 
be handled by the old system of segregating the paying and 
receiving tellers; the customers express their appreciation of 
the service rendered, and the management of the bank feel 
that the innovation has succeeded in solving the difficult 
problem of handling the large number of accounts in a 
manner far ahead of all expectations. 

"To give some idea of the volume of business passing 
through the bank, I would state that in one day recently we 



142 THE PRACTICAL WORK OF A BANK 

handled in the various departments over twenty-two 
thousand items." 

Proverbs of a Paying Teller. 6 

It is more blessed to pay than receive, for at the end of 
the month thy recompense is greater than his. 

Moreover in union there is strength; therefore happy is 
he whose salary is fixed by the board, rather than by the 
officer. 

My son, despise not an overage and in the latter day it 
shall requite thee, for a false balance is an abomination; but 
a five-dollar shortage is simply . 

The forward man stoppeth payment upon a check; and 
she that loseth a voucher diggeth a pit. 

Better is a little cash and a just balance than much cur- 
rency and a shortage therewith. 

The foolish woman telephoneth for her balance; but the 
wise teller seeth her first. 

He that is short-changed returneth again; but the one 
with the extra ten tarrieth not. 

The cashier hath forbidden an overdraft and pay-day is 
afar off; but he knoweth not that the employee's check is in 
the cash. 

The customer layeth wait and the messenger lurketh 
privily to destroy thee without a cause; but a good endorse- 
ment is a strong tower. 

Who hath woes, who hath sorrow, who hath redness of 
eyes, even he that cometh upon a counter error two days 
afterward. Verily he seeketh in vain for help. 

Seest thou thy neighbor diligent in checking over the 
day's work? Say not, "Hast thou a difference?" Even a 
fool, when he holdeth his peace, is counted wise. Mayhap he 
practiceth penmanship or seeketh some reason why his salary 
has been raised. 

As a man that taketh away a garment in winter, so is he 
that singeth songs when thou hast a difference. 

He that whistleth over his work and he that robbeth a 
dead body are on their way to the same place. 

The Treasury sendeth new currency and the clerk cut- 

6J. S. MacDonnell of the First National Bank of Pasadena, Cal. Paper 
read before Los Angeles Chapter, American Institute of Banking. 



THE PAYING TELLER 14* 

teth it asunder; but the naughty person winketh with his 
eyes and sayeth, "Aha, aha, thou art making money fast." 
Of the surety, one generation passeth away and another gen- 
eration cometh; but that joke abideth forever. 

Seest thou a man getting a check book for his wife? Jest 
not with him, lest he tell thee that hoary one regarding her 
overdraft and all the stubs she had remaining. 

This have I observed — one man hideth his money in his 
bosom and another putteth it in his trousers' pocket ; but the 
stout woman hath them skinned to death for a safe place. 

I had rather be a doorkeeper in the house of the Lord 
than count the collections therefrom on Monday. 

Six things do I hate, yea, seven are an abomination unto 
me; a stop payment, a go-back, an overdraft, he that coughs, 
in thy face, he that dabbleth in the cash, the deaf man that 
cannot be identified and one from just beyond the Needles, 
who speaketh as a wise man of the East. 

Hearest thou one that saith, "Lo, this is done in the 
East," or "Lo, it was never on this wise in the East." Pass 
not nigh unto liim, for a hayseed lurketh in his hair, neither 
hath he at any time been a day's journey from his own 
dunghill. 

One woman leaveth her glasses at home and another is 
nervous in the morning; but she that signeth her name with- 
out making excuse, the same is not a bride. 

Happy is the woman that findeth new currency, for the 
merchandise of it is better than the merchandise of silver. 

He that bringeth a "go-back" in season receiveth fine 
gold, but a slothful messenger receiveth a fine without gold. 

The nervous man rusheth in haste to the wicket, he 
snatcheth the coin and hasteth away; also he treadeth heav- 
ily upon the feet of the innocent ; but the prudent one catch- 
eth the same car, neither forgetting his umbrella. 

Once have I observed this, yea, twice have I known it; 
for the simple one sayeth, "It is all one, pay me silver or 
gold, large money or small, it matters not, seeing it is soon 
spent." Possess thy soul and wait upon him patiently, for 
he will not depart until thou hast changed all his money 
seven fold. 

He that introduceth a friend and will not endorse for 
him, hath not understanding, and to argue with him is like 
casting pearls before swine. 



144 THE PRACTICAL WORK OF A BANK 

The foolish one saith, "Lo, I have covenanted with a 
gold piece for a newspaper, and with a five-dollar piece have 
I purchased a ride on a street car, therefore pay me in cur- 
rency, lest my riches depart from me for that which is 
naught." My son, refrain thyself from him, for he never 
had more than four dollars. 

My son, put not thy trust in perfume. Follow hard 
after her if thou wilt, but look up her check first. 

The Acid Test for Coins 

Formulas to make the acids for the tests of gold and 
silver are as follows : 

For gold : Six and one-half drams nitric acid, one-quarter 
dram of hydrochloric acid and five drams of water. 

For silver: Twenty-four grains silver nitrate, thirty 
drops of nitric acid and one ounce of water. 

If after a careful examination of the coin the first sus- 
picion is not allayed, the acid test may be used. If it does 
not affect the coin, then the metal is genuine, but if it turns 
it black, the coin is counterfeit. 

SUPPLEMENT TO SECOND EDITION 

legae-tendee and redemption qualities of united 

States Money 

The money in circulation in the United States consists of 
gold, silver, nickel, and bronze coins, certificates representing 
coin, and notes, all issued by the Government, and notes 
issued through the Federal reserve banks and national banks 
under Government regulations. The gold dollar is the stand- 
ard unit of value. Both gold coins and standard silver dol- 
lars are standard money. Lawful money is a term used to 
denote the legal-tender quality of money and first originated 
in the act of February 25, 1862, authorizing the issue of 

Note: There are several protecting devices on the market, some cutting the 

figures out of the paper, others stamping the words "not over — Dollars" 

into the fibre of the paper. Other devices called "check writers" impress the 
exact amount in words into the paper on the line provided for writing the 
words. The author leaves it to the reader's judgment as to the mechanical 
qualities of each. They are all based on the one idea — of impregnating the paper 
with an acid-proof ink in such manner as to destroy the surface of the paper 
and prevent alteration. 



I Statutes, Forbids a Bonk t 



Its liabilities by ■ 



i below the legal requirement- 



r loans or discounts, or to 



CALCULATION OF THE LAWFUL MONEY RESERVE OF NATIONAL BANKS LOCATED ELSEWHERE 
THAN IN RESERVE CITIES AND CENTRAL RESERVE CITIES. 



No of Bunk Report of the state of lawful money reserve of the 

Located at - State of 

191 



o'clock m. 



ITEMS ON WHICH RESERVE IS TO BE COMPUTED. 



Should the aggregate Due 
from" exceed the aggre- 
gate " Due to" Banks, both 
ltemB must be omitted 
from the calculation. 



Due to Approved Reserve Agents. 

Duo to Banks other than Federal 
Reserve Banks 



Due from Banks other than legal Reserve with Federal 
Reserve Bank and Reserve Agents. (See footnote t)~ 



3. Dividends unpaid 

4. Demand Deposits 

5. f%j of Time Deposits . . . 

6. Gross amount 
DEDUCTIONS ALLOWED. 

7. Checks on other Banks in the same place 

8. Exchanges for Clearing House 

9. Net amount.. . 



10. Twelve per cent of this amount 
which is 



the necessary legal Reserve required, 



REQUIREMENTS FOR NET RESERVE AND ITEMS COMPOSING RESERVE ACTUALLY HELD. 



Legal Reserve Required. 



11. In vault (not less than & of total required 

reserve shown in Item 10) $.. 

12. With Federal Reserve Bank (not less than 

ft of total required reserve shown in 
Item 10) $.. 



Legal Reserve Held. 

Silver Dollars S 

Fractional Silver _ 

Silver Certificates 

Legal Tender Notes 

Gold Coin 



Gold Certificates 

Gold Certificates payablo 

to order 

C. H. Certificates for coin 

or legal tender 



13. With approved reserve agents (not more 

than A of total required reserve shown 

m Item 10) $ 

14. Total required (must agree with Item 10). $ 



Deficiency in vault $__ 

Deficiency with Federal Reserve Bank ... $.. 

Deficiency in total required reserve $.. 

Per cent of Item 18 to 9 



16. With Federal Reserve Bank $. 

17. I/ist net balances with agents: 

_ S 

$ 



Total 

"(If more than ft deduct 
excess) 



Total held $.. 



Excess in vault over amount required $.. 

Excess with Federal Reserve Bank over amount 
required $.. 



Excess over total required reserve . 



* This subtotal must not exceed amount shown in 1 
t Excess with Reserve Agents to be included here. 



CALCULATING TB 



.--.^~rw^r£r£.^^^^^^ 



before being treated as authoritative. 



THE PAYING TELLER 144a 

United States notes. Legal tender is a quality given a cir- 
culating medium by Congress, and possessing this quality it 
becomes lawful money. All forms of money do not possess 
full legal-tender qualities, yet each kind has attributes as to 
give it currency, and all forms are convertible into standard 
money. The Secretary of the Treasury is required to main- 
tain the parity of all kinds of money with the standard unit of 
value, and if necessary to maintain such parity he is author- 
ized to borrow or buy gold. 

The status of each kind of money is as follows : 

1. Gold coin is legal tender at its nominal or face value 
in payment of all debts, public and private, when the coin is 
not below the standard weight and limit of tolerance pre- 
scribed by law, and when below such standard weight and 
limit of tolerance it is legal tender in proportion to its weight. 
Being standard money, gold coins are not redeemable. 

2. Gold certificates are not legal tender, but are receiv- 
able for all public dues and when so received may be reissued, 
and they may be held by Federal reserve and national banks 
as lawful reserve. Gold certificates are receipts for actual 
deposits of gold in the Treasury and are redeemable in gold 
coin by the Treasurer and all assistant treasurers of the 
United States. 

3. Standard silver dollars are legal tender at their nom- 
inal or face value in payment of all debts, public and private, 
without regard to the amount, except where otherwise ex- 
pressly stipulated in the contract. Being standard money, 
standard silver dollars are not redeemable. 

4. Silver certficates are not legal tender, but like gold 
certificates they are receivable for all public dues and when so 
received may be reissued, and they may be held by Federal 
reserve and national banks as lawful reserve. Silver certifi- 
cates are receipts for actual deposits of standard silver dollars 
in the Treasury and are redeemable in such dollars only. 

5. Treasury notes of the act of July 14, 1890, are legal 
tender for all debts, public and private, except where other- 
wise expressly stipulated in the contract. They are redeem- 
able in United States gold coin or in standard silver dollars 
at the option of the holder by the Treasurer and all assistant 
treasurers of the United States. When received by the 
Treasurer they are canceled and replaced by silver certificates. 

6. United States notes (also known as greenbacks and 
legal tenders) are legal tender for all debts, public and pri- 

10 



144b THE PRACTICAL WORK OF A BANK 

vate, except duties on imports and interest on the public debt. 
Upon the resumption of specie payments January 1, 1879, 
these notes were accepted in payment of customs dues and 
have been freely received on that account since though the 
law has not been changed. They are redeemable in United 
States gold coin in any amount by the Treasurer or any assist- 
ant treasurer of the United States, and when received are 
reissued. 

7. Federal reserve notes are not legal tender, but are re- 
ceivable by the Government for all public dues and are receiv- 
able on all accounts by all Federal reserve banks, national 
banks and other banks members of the Federal Reserve Sys- 
tem. They are redeemable in gold coin of the United States 
by the Treasurer and in gold or lawful money by any Federal 
reserve bank. 

8. Subsidiary silver coins are legal tender for amounts 
not exceeding $10 in any one payment. They may be pre- 
sented in sums or multiples of $20 to the Treasurer or any 
assistant Treasurer of the United States for redemption or 
exchange into lawful money. 

9. Minor coins of nickel and bronze are legal tender to 
the extent of 25 cents. They may be presented for redemp- 
tion or exchange under the same conditions as are provided 
for subsidiary coins. 

10. National bank notes are not legal tender, but are re- 
ceivable for all public dues except duties on imports, and may 
be paid out by the Government for all purposes except inter- 
est on the public debt and for redemption of national bank 
notes. They are redeemable in lawful money of the United 
States by the Treasurer, but not by the assistant treasurers, 
and are also redeemable at the bank of issue. 

11. Federal reserve bank notes are identical in all their 
attributes with national bank notes. 

Foreign coins are not legal tender. — Section 3584 of the 
Revised Statutes of the United States provides that no for- 
eign coin shall be a legal tender in the United States. 

"Coin 33 obligations of the Government are redeemed in 
gold coin when gold is demanded and in silver when silver is 
demanded. 



CHAPTER VII. 
CLEARINGS AND CLEARING-HOUSES 

The settlements which a bank makes with its customers 
are not in the main in cash over the counter, but through 
the medium of bank clearing machinery which offsets the 
debts of one bank against the debts of another in total, 
whatever difference there exists being paid in money. It is 
apparent that if a bank were to assemble all the checks it 
receives in the course of the day on every other bank, and 
present them over the various counters and receive payment 
in cash, it would not only require the use of a large amount 
of money, but consume time, involve risk and prove highly 
unsatisfactory to all concerned. The most likely substitute 
would be for the banks to exchange checks, and adjust the 
differences. If there were not many banks in the same city 
the interchange of checks in this manner might be satisfac- 
tory, but it would be cumbersome: and if messengers were 
to be sent out to do this work, they would no doubt soon 
evolve a plan whereby they might meet at some central point 
and make their exchanges. 

The clearing-house has been defined as "an institution 
maintained by an association of banks, acting under self- 
governing rules, for the purpose of facilitating concerted 
action among its members in adjusting accounts against 
each other with the greatest ease and at a minimum cost, and 
to strengthen the credit of all members by mutual watchful- 
ness and assistance in times of stringency." 

The clearing-house is not, as a rule, finely housed as is 
the New York Clearing-House, whose palace of marble and 
bronze is one of the ornaments of lower New York, but it is 
more often a simple organization of banks, meeting in a 
convenient place from time to time, and making the daily 
settlements through a bank selected for that purpose. 

It is the greatest embodiment of the "get-together" idea 
in banking circles. Through it the use of banking credit 
reaches its highest perfection and cash is reduced to its 
proper place in the economic scheme — the settler of balances. 
The New York Clearing-House has settled exchanges 

145 



146 THE PRACTICAL WORK OF A BANK 

amounting to $2,509,034,041,053 in sixty-one years, with but 
$117,797,140,257 in money. And so gradually has the 
clearing-house made its way into the banking scheme that 
it is difficult to trace the idea back to its origin. 

The clearing-house, although originally intended as a 
simple arrangement to assist members in making a daily 
exchange of checks and settlement of balances, has grad^ 
ually become the effective medium of cooperation among 
banks in all matters of mutual interest and in matters affect- 
ing the financial well-being of the community served. In 
the development of the movement, new functions have been 
added and each step has been taken with the idea of protect- 
ing its members and insuring banking and business stability. 
In each financial crisis clearing-houses have taken the initia- 
tive in suggesting and causing the members to adopt reme- 
dial measures in the interest of the banks and the general 
public. 

Origin of the Clearing-House 

The clearing principle dates back to about 1775, al- 
though before that time it is possible men balanced their 
affairs by an exchange of credit. The clearing-houses of 
old were the great periodical fairs, whither went merchants, 
great and small, bringing their "tallies" to settle their mu- 
tual debts and credits. "Justiciaries" were set over the fairs 
to hear and determine all commercial disputes, and to prove 
the "tallies" according to the commercial law, if the plaintiff 
desired this. These "tallies" were notched sticks of hazel- 
wood, split down the center, one part going to the debtor 
and the other to the creditor. The most famous of these 
fairs was that of St. Giles in Winchester, while probably the 
most famous in all Europe were those of Champagne and 
Brie in France, to which went merchants and bankers from 
all countries. Exchange booths were established and debts 
and credits were cleared to enormous amounts without the 
aid of a single coin. 1 

Claim is made that as early as the fifteenth century the 
merchants of Naples had an arrangement for the clearing of 
claims. About 1773, in London, the collecting clerks con- 
nected with banking houses arranged, for their own con- 

iA. Mitchell Inness, "What is Money." 



CLEARINGS AND CLEARING-HOUSES 147 

venience, to meet at an agreed point to exchange checks and 
items. The merchants and bankers recognized the saving of 
time and expense in having a convenient place to make ex- 
changes and provided a building for the purpose. In this, 
the first clearing-house, the members had not only the advan- 
tage of a common meeting place, but they were able to make 
use of the clearing principle, which is the offsetting of debts 
and credits and the settlement of balances. 

This system was soon foHowed in continental countries. 
In 1858, the London Clearing-House established a depart- 
ment for the collection of country checks. The problem in 
the European countries is somewhat different from ours. 
There the banking is highly centralized. In England, for 
instance, there are but few banks, but the banks have hun- 
dreds of branches scattered throughout the country, the 
activities, however, centering in London. Each bank is real- 
ly a clearing-house in itself, at least of credit and trade in- 
formation. 

The London Clearing-House has but few members, but 
the banks with their numerous branches represent a large 
portion of the banking power of England. The clearing- 
house itself is a wonderful institution, existing primarily 
for the exchange of checks. There are two clearings a day, 
balances being settled by drafts on the Bank of England. 

In the United States the first suggestion in regard to 
clearing-houses was made by Albert Gallatin in 1831. In 
1853 the bank messengers in New York were in the habit 
of meeting at a point in Wall Street to exchange checks 
and notes. As in the case of the London clerks, this ar- 
rangement was for convenience. The necessity was recog- 
nized by the bankers and on November 11, 1853, represen- 
tatives of fifty-two banks met and adopted a plan for the 
daily clearing of checks and settlement of balances and a 
building was provided for the purpose. The action of the 
New York bankers was followed in Boston in 1856, Phila- 
delphia in 1858, Chicago 1865, St. Louis 1868 and at other 
points, until to-day there are about one hundred and 
eighty- two regularly organized clearing-house associations. 
In about fifty other localities clearing arrangements exist. 

How effectively the clearing-house obviates the use of 
money will be seen from the fact that a Boston bank sent 
to the Boston Clearing-House checks to the amount of $11,- 



148 THE PRACTICAL WORK OF A BANK 

000,000 and had a debit balance of only $2,800.49. At an- 
other time it settled a debit against it of $6,180,000 with 
$167.31. The largest daily transactions in the New York 
Clearing-House were those of November 3, 1909, the ex- 
changes being $736,461,548.70 and the balances $27,672,- 
393.74. The largest balances were of July 2, 1914, $50,- 
231,026.24. The largest average dailv clearings were in 
1906, $342,422,772.57. 2 The largest debit balance paid by 
any one institution to the New York Clearing-House was 
for $37,661,685.00 on October 3, 1905. The largest balance 
received by any member from the clearing-house was for 
$34,086,068.54 on January 23, 1914. The smallest balance 
ever settled at the clearing-house was for $0.01 on Septem- 
ber 22, 1862. Seven millions on a credit sheet have been 
settled through the clearing-house for ten cents. The Bos- 
ton City Bank has settled a day's clearings without having 
any balance, but these instances are rare. 

The Largest Check Ever Paid 

The largest check on record was drawn by Kuhn, Loeb 
k Company on the National Bank of Commerce in payment 
for $49,000,000 of four and one-half per cent, bonds re- 
cently sold to them by the Pennsylvania Railroad. 

The check, which included accrued interest, was for $49,- 
098,000. Two Pennsylvania officials came over from Phila- 
delphia to receive it, and deposited it in the National Bank 
of Commerce to the credit of the railroad. 

The principal transaction thus involved no actual money 
payment, but was accomplished by a book entry, the Nation- 
al Bank of Commerce charging the amount to one depositor 
and crediting it to the other. 

For this reason there was no enormous balances at the 
clearing-house on account of this bond sale, as there was 
when payment was made by Kuhn, Loeb & Company and 
W. A. Bead & Company for $51,000,000 bonds of the State 
of New York a year ago, when $34,000,000 in cash was 
taken away in one day by the Bank of the Manhattan 
Company. 

Yesterday was not only the time set for Kuhn, Loeb & 

2 From 1914 report of New York Clearing House. 



CLEARINGS AND CLEARING-HOUSES 149 

Company to pay for the bonds, but also for payment to be 
made to them by the individuals, insurance companies, sav- 
ings banks, estates, or others who had subscribed for them 
when publicly offered by the bankers. These subscribers 
paid five per cent/of the amount subscribed for about two 
weeks ago and the balance due on the bonds awarded to 
them yesterday. 

The issue was oversubscribed five times and in general 
the bidders got about eighteen per cent, of the amounts 
they sought, so that the five per cent, payment on their bids 
amounted to fully twenty-five per cent, of the total pay- 
ments to be made, and the balances paid yesterday were 
less than seventy-five per cent. 

Goes Back to Original Banks 

In the aggregate these payments, including the first five 
per cent., were more than $49,000,000. The payments were, 
therefore, $50,715,000 and accrued interest. Most of these 
payments, including the checks received yesterday, were de- 
posited by Kuhn, Loeb & Company in the National Bank 
of Commerce and constituted the bulk of the credit against 
which Kuhn, Loeb & Company drew the $49,000,000 check. 
The Pennsylvania Railroad having deposited the check and 
established a credit of that amount in the bank, next drew 
a series of checks to distribute the amount among a number 
of banks. 

The usual practice in these transactions is to distribute 
the proceeds among the banks on which the ultimate pur- 
chasers of the bonds drew their checks. This is done, of 
course, only as to substantial amounts, and other variations 
generally enter into the shifting of credits, but if the Penn- 
sylvania adopted this course, and if it were carried out in 
every detail the net result would be that the Bank of Com- 
merce would have no more and no less deposits on account 
of the bond sale at the end of the day than at the beginning, 
except for the profits of the sale. This also disregards the 
fact that the Bank of Commerce may have participated as 
a member of the syndicate and simply considers it as the in- 
termediary through which the payments were effected. 

In that case the checks drawn by the purchasers of the 
l)onds on various institutions would be offset in the clearings 



150 THE PRACTICAL WORK OF A BANK 

to-day by checks drawn on the Bank of Commerce and de- 
posited in the various institutions, just as the big check was 
offset by its own deposit. The whole process would result in 
each institution charging the accounts of its depositors who 
were purchasers with the amounts of their checks and cred- 
iting the Pennsylvania Railroad with the same aggregate 
amount. While it is not supposed that the transactions 
were arranged with this exactitude, it is believed that rough- 
ly this is what took place, if the Pennsylvania followed the 
usual practice. 3 

Varieties of Clearing-Houses 

Clearing-houses are of two kinds: Clearing-houses 
and clearing and supervision houses. The first kind merely 
clears the checks and collects and settles the balances in 
one way or another ; the others not only clear the checks, but 
supervise the banks through examiners, fix the rates of 
exchange (see chapter eleven), interest paid on balances, 
and promulgate other stringent rules that must be adhered 
to under severe penalties. They are further classified into 
those which settle their balances in cash or its equivalent — 
the clearing-house certificate, or due bill, and those which 
settle their differences by draft. 

The term "clearing-house" has reference to the associa- 
tion more than to the institution, although it is easier to con- 
ceive of a "house" being a finely adorned palace than a mere 
meeting place. 

Trade being to a considerable extent local, it is but nat- 
ural that a large part of the checks received through the re- 
ceiving teller's window should be on banks in the neighbor- 

3From the New York Times February 18, 1915. 

Addendum to second edition 

On March 16, 1916, a check for $43,538,131.11, drawn to the order of the Guar- 
anty Trust Company of New York, passed through the New York Clearing-House. 
As far as can be learned, this is the largest bank check that has ever passed 
through a clearing-house in the United States. 

This check was drawn in payment for the issue of Midvale Steel and Ordnance 
Company five per cent, convertible bonds, which were recently sold by the syndi- 
cate headed by Lee, Higginson & Co., the Guaranty Trust Company and the 
National City Bank. 

On the same day the New York Clearing-House Association reported a credit 
balance in favor of the Guaranty Trust Company of New York of $39,279,235.38. 
With but one exception this is the largest credit balance in favor of any banking 
institution ever reported by the New York Clearing-House Association. The only 
other larger credit on record was for $39,597,421.89 in October, 1915, in favor of 
the National Bank of Commerce. (April, 1916, Bankers' Maarazine. N. Y.) 



CLEARINGS AND CLEARING-HOUSES 151 

hood, and these are collected through the clearing-house to- 
gether with items received by the bank from its corre- 
spondents for collection. While the methods of settling 
balances differ in localities, they are all based on the one 
idea — to pay only the balance. Not only are checks paid 
thus, but drafts, notes falling due, certificates and cash in- 
struments in general are also cleared by having them prop- 
erly accepted and made payable through the clearings. 

The territory served by the clearing-house is usually 
local, being confined to the limits of a city; but a few, no- 
tably the Boston and the Kansas City Clearing-Houses, 
cover a wide territory and act as the clearing medium for 
hundreds of banks. (See chapter eleven.) 

Clearing-House Terms and Instruments 

It would naturally be inferred that the term "payable 
through the clearing-house" meant pltysically passing the 
instrument through the building, while in practice it merely 
means to pass through a process of "clearing." And this 
"clearing" simply means that the checks of one bank are 
settled by an exchange of checks on the other. Checks are 
often drawn payable through the clearing-house only, and 
this in times of stress obviates the use of money over the 
bank's counters, and prevents the crowd from gathering in 
the lobby. Such restrictions were largely used in 1907. To 
"clear" a check is to take it to the clearing-house, clearing- 
room or bank, and there exchange it for another check, pay- 
ing the difference in cash. "Clearing-house exchanges" 
means simply the checks and the amount thereof on hand, 
which will be offered for "clearing" through the clearing- 
house. The "clearing-house balance" means, in the nomen- 
clature of banking, the amount that the bank owes or has 
due to it from the members of the clearing-house. "Clear- 
ing-house certificates" are certificates issued by the clearing- 
house for gold deposited in its vaults. These certificates 
are essentially cash, and so regarded in settlements and in 
figuring the reserve. They are issued in large denominations 
— $5,000 and $10,000 — and are good only between banks. 
About one-quarter of the 182 clearing-houses of the country 
use these certificates, about forty per cent, settling by draft 
on other cities. 

The "clearing-house due bill" is given for items not 



152 THE PRACTICAL WORK OF A BANK 

cleared for some reason, or given in lieu of certification, as 
a cashier's check, or for use in payment of notes or other 
obligations where cash is demanded. They are also used to 
pay balances under $5,000. They are payable only through 
the clearing-house the day after issue. These due bills are 
deposited by the manager to his credit in a member bank 
and checked against in favor of creditor banks. 

"Clearing-house loan certificates" are used in time of 
financial stringency to dispense with the use of cash. They 
were first issued in 1860, and in 1861, 1863, 1884, 1890, 1907 
and 1914. They are secured by deposit of stocks and bonds 
and commercial paper and release that much cash for other 
purposes. High interest is charged the bank obtaining them 
and they are, therefore, retired as soon as their usefulness is 
over. In some places they have been issued in denomina- 
tions small enough to circulate as money, and were to all 
intents and purposes an asset currency. In New York they 
have never passed current except between banks. On ac- 
count of the interest that follows, banks will not allow them 
to remain out longer than the conditions warrant. In times 
of panic the "loan committee" performs a very important 
function in its morning meetings, when it passes upon the 
collateral offered as security for these clearing-house cer- 
tificates, the usual margin being twenty-five per cent. The 
collateral is pledged with the clearing-house with power to 
collect and sell if the certificates are not paid. The collat- 
eral consists of stocks, bonds and commercial paper, the lat- 
ter predominating. 

In order to understand the magnitude of the work that 
leads up to the morning's clearings, we shall need to go back 
to the receiving teller's department. A pen picture of this 
work is here presented as typical of a large New York bank. 
At this desk the half-dozen tellers are busily engaged all 
day receiving the deposits. These deposits range from petty 
sums up to millions. To handle the many millions of dollars 
deposited each day requires not only a large force of men, 
but necessitates a division of the work, so that a proof can 
be made within a reasonable time. In this particular bank 
the receiving teller has sub-divided his department into three 
parts — the main department, of which he takes immediate 
charge; the special department, in charge of an assistant, 
and the annex, in charge of another assistant. Up to two 



CLEARINGS AND CLEARING-HOUSES 158 

o'clock, as fast as the teller receives the deposits, they are 
turned over to the special department. This special depart- 
ment has a force of ten to twelve experienced men. Four 
checkers are the first to receive the deposits. Each man takes 
a deposit, checks it, putting on the deposit slip the clearing- 
house number of the bank on which the check is drawn, the 
letter "C" if it is a cash item, or "S. D." if it is a sight draft. 
This is done so that in case any question comes up re- 
lating to the deposit or the check, the item or items could 
easily be located. After the checking process the items are 
given to two men who put the "Paid" stamp on them. When 
the stampers turn the checks over to the sorters, it is the 
duty of this force to sort the checks into the boxes marked 
with the names of the banks on which the checks are drawn. 
This work finished, the machine men come into play. Each 
man has a number of boxes (representing so many banks) 
assigned to him, and his duty is to list the checks drawn on 
each bank. For instance, he has checks drawn on No. 8 
(National City Bank). He lists them, puts them aside and 
continues this operation with the numerous checks until the 
time arrives for the closing of this department, which is two 
o'clock, when they make their proof. 

Then the annex is called into action, when what is prob- 
ably the busiest part of the receiving teller's day begins, for 
it is at this time that the brokers and trust companies hand 
in their deposits. There are times when it is a very ordinary 
occurrence for deposit tickets yards in length to be received, 
and upon the annex devolves the duty of getting them out 
of the way. A large force takes hold of this work, and at 
half-past four they are ready to strike a proof. 

While the annex is working its way out, the main di- 
vision is busily engaged in taking care of the deposits that 
go to the credit of individual depositors. 

Each sub-division makes its own credits, and, after the 
checks are all taken care of, they make a separate proof. 
If all three divisions prove, the receiving teller and his active 
men are disengaged until the following day. We now have 
the receiving teller proved, and having charged the total of 
his exchanges over to the night force. This force is com- 
posed of fourteen men, who arrive at the bank at midnight. 
Along with this force comes the mail, with its out-of-town 
checks and drafts that go to make up the credits of the hun- 



154 THE PRACTICAL WORK OF A BANK 

dreds of banks and trust companies that do business with 
this institution. 

The night force, using the letters as credits, handle the 
checks in about the same manner as described in the receiv- 
ing teller's work. A second mail is received at three A. M« 
and again another one at seven o'clock. If, by chance, the 
night force has not proved when eight o'clock arrives, they 
go, the difference being turned over to the main department. 
This department now takes hold of the machinery of the 
bank. For general activity the mail department is in a class 
by itself. Here is where the reserves of the bank are called 
into action. One hundred and twenty-five men are at the 
disposal of a clear-headed individual, upon whom rests the 
responsibility of getting in shape to be cleared the many 
millions of dollars in checks that must be ready at 9.45. At 
this time the captain is given control. He places every man 
at his station. Each one knows what his particular duties 
are, and when 9.30 arrives and the captain orders "all in," 
the general proof begins. The total of the slips are listed on 
the envelopes printed with the name of the bank upon 
which the checks are drawn, and the totals of the envelopes 
are called off, being listed by two men ; one taking down the 
amount in the long book and the other on the clearing-house 
sheet. If the totals of the long book and the sheet prove, 
the settling clerk goes to the clearing-house. The clearing 
clerk, with his assistants, now loses no time in getting the 
boxes, containing probably forty-five to fifty thousand 
checks, and representing millions in money, also to the 
clearing-house. 4 

The Clearing Process 

The clearing process is simple : All checks to go through 
the clearing-house are sorted into batches representing the 
various banks and those for whom they clear. The amounts 
are carried to a "clearing-house settling sheet," which con^ 
tains the names of all the clearing-house members. The 
amount set opposite each name is the total of the checks en- 
closed in an envelope, and which the presenting bank will 
collect from the other bank through the clearing-house 
The total of these envelopes is its total credit with the 
clearing-house, and the difference between the amounts of 

4A. M. Barrett in the Bankers Magazine. 



CLEARINGS AND CLEARING-HOUSES 155 

the checks it brings and the checks it receives, its debit or 
credit balance as the case may be. 

A credit ticket is made out showing the amount due from 
each bank to the bank presenting. (Clearing-house banks 
are known by numbers among the clerks, it being uncommon 
to use the title of the bank. Thus, the National Park Bank 
will always be referred to as "54".) There is also a column 
on the settling sheet for the amounts which will be presented 
against the bank, and for these amounts it must, through 
the clearing-house, settle with the other banks. Thus, if 
the First National Bank owes the various banks of the 
clearing-house $500,000, as shown by ope column, and has 




No. 107. Nrro fork (Blearing lunar. 



.191 



Debit Guaranty Trust Company of N. Y., Amt rec'd, $_ 

Credit " " " " Brought, $_ 



Cr. Bai. Due Guaranty Trust Company of N. Y., $.. 



_~_ Debit Balance Due Gearing House 



-Settling Clerk. 



CLEARING-HOUSE DEBIT TICKET 



due to it $300,000, as shown by the other, it would owe the 
banks as a whole $200,000, which it would settle, not by 
paying them, but by paying the clearing-house, the clearing- 
house in turn paying the various banks. While one bank 
might owe another, it might still have a balance due it from 
the banks as a whole. In other words, the banks all pay to 
the clearing-house the amount they owe and the clearing- 
house distributes the amount among those to whom it is due. 
When the sheet is ready for the clearing-house it is given to 
the settling clerk, who must be a rapid and accurate worker, 
and who is accompanied by a delivery clerk. The checks of 
some of the New York banks are so numerous that it some- 
times requires two men to carry the leather case used for 
clearing-house settlements. 

The envelopes are arranged consecutively and the deliv- 
ery clerk has the checks and a duplicate of the settling sheet 
with the entries made thereon. On this sheet the other clerks 
will receipt for the amounts when delivered to them. The 



156 



THE PRACTICAL WORK OF A BANK 



No. 107 Guaranty Trust Company of New York 

Delivery Clerk's Statements 



Nq, 


BANKS 


AMOUNT BROUGHT 




RECEIVED BY 




! 


Bank of N. Y., Nat'l B'k'g Ass'n 










1 












2 


Bank of the Manhattan Company 










2 












3 


Merchants' National Bank 










3 










1 


4 


Mechanics & Metals Nat'l Bank 










4 












6 . 


Bank of America 










6 












8 


National City Bank 










S 












12, 


Chemical National Bank 










12 












13 


Merchants' Exchange Nat'l Bank 










13 












15 


Nat'l Butchers' & Drovers' Bank 










15 












17 


Greenwich Bank 










17 












21 


American Exchange Nat'l Bank 










21 












23 


National Bank of Commerce * 










23 












28 


Pacific Bank 










28 












30 


Chatham & Phenix Nat'l Bank 










30 












31 


People's Bank 
Hanover NationaLBank. 










31 
33 













No. 107 Guaranty Trust Company of New York 

Settling Clerk's Statements 



No. 


BANKS AMOUNT BROUGHT 




RECEIVED BY 






1 
2 
3 
4 
6 
8 
12 
13 
15 
17 


Bank of N. Y., Nat'l B'k'g Ass'n | 
Bank of the Manhattan Company 11 
Merchants' National Bank 
Mechanics & Metals Nat'l Bank 1 
Bank of Ar- erica 
National City Bank 
Chemical National Bank jj 
Merchants' Exchange Nat'l Bank 1 
Nat'l Butchers' & Drovers' Bank U 
Greenwich Bank | 








2 
3 
4 
6 
8 
12 
13 
15 
17 














21 


American Exchange Nat'l Bank 










21 














23 


National Bank of Commerce * 










23 














28 


Pacific Bank 










28 














30 


Chatham & Phenix Nat'l Bank 










30 














31 


People's Bank 








31 














33 


Hanover National Bank 








^ 


J3 













DELIVERY CLERK'S AND SETTLING CLERK'S CLEARING-HOUSE STATEMENTS 



clearing-house manager has a list of banks with provision 
for entering the amount due to and from each bank, these 
figures being obtained from the slips sent up by the settling 
clerk upon his arrival. 

Each bank has a desk behind which sits the settling clerk. 
The delivery clerk stands in front. One minute before the 



CLEARINGS AND CLEARING-HOUSES 157 

clearing begins, the bell is sounded as a signal to get ready* 
On the tick of the clock it is sounded again and the line be- 
gins to move. The delivery clerk hands in his envelope, 
with a ticket showing the amount, from whom it came and 
to whom it goes. The clerk behind the desk enters upon his 
sheet the amount shown on the envelope as a credit to the 
bank from which it comes. His assistant initials the dupli- 
cate sheet as a receipt for the items. In the meantime the 
delivery clerk has deposited a package at the next desk, 
dropped the ticket and taken the sheet from the first desk. 

When the delivery clerk has completed his rounds he 
will be before his own desk, and will have delivered all his 
checks. The settling clerk will have received all packages 
against his bank, and the whole process will have taken less 
than ten minutes. The sheet of the delivery clerk will be 
fully receipted for all items delivered, and the settling clerk 
will have received all items against his bank, which he must 
list and total to ascertain whether the balance is for or 
against him. The delivery clerk counts the number of 
packages, compares them with the figures made by the 
settling clerk on his sheet and if found correct takes them to 
the bank. The settling clerk remains to make the proof. 

He totals the figures and the result shows whether the 
bank owes the clearing-house (a debit balance) or has an 
amount due it (credit balance) and this balance is sent to 
the manager. The amount brought, the amount received 
and the difference are listed and sent to the clearing-house 
proof clerk. The proof clerk has made similar entries from 
the tickets sent up to him, and the result of the work of the 
men on the floor must agree with the result he has obtained 
by another process. Forty-five minutes are allowed for the 
proof and there is a fine for delay. After 11.30 the fines 
are doubled. The longest session in the New York Clearing- 
House was caused by a difference of ten cents. The author 
has seen three hundred million "cleared" in the above process 
in six minutes. The amounts due to and from the various 
banks are then called off in even thousands by the manager 
and taken down for the information of the banks. 

Settling the Balances 

The amounts due and receivable must now be adjusted. 
It is apparent that in so short a time the bank cannot stop 



158 



THE PRACTICAL WORK OF A BANK 



No. 107 

Guaranty Trust Company of New York 
CLEARING HOUSE BALANCES 

191 



BANKS 


No. 


Dr. Cr. 

Thousands | Thousands 


Bank of N. Y M Nat'l B'k'g Ass'n 


1 






Bank of the Manhattan Company 


2 






Merchants' National Bank 


3 






Mechanics & Metals Nat'l Bank. 


4 






Bank of America 


6 






National City Bank 


8 






Chemical National Bank 


12 






Merchants' Exchange Nat'l Bank 


13 






Nat'l Butchers' & Drovers' Bank 


15 






Greenwich Bank 


17 






American Exchange Nat'l Bank 


21 






National Bank of Commerce 


23 






Pacific Bank 


28 






Chatham & Phenix Nat'L Bank 


30 






People's Bank 


31 


*> 




Hanover National Bank 


33 






Citizens Central Nat'l Bank 


36 






National Nassau Bank 


40 




" 


Market & Fulton National Bank 


42 






Metropolitan Bank 


44 






Corn Exchange Bank 


45 







CLEARING-HOUSE BALANCES ARE CALLED OFF BY THE MANAGER AND TAKEN DOWN ON 
THESE SHEETS FOR THE BANKS* INFORMATION 



to examine the checks to ascertain if they are good or not, 
regularly indorsed, payment stopped, or returnable for some 
other reason. By the rules of the clearing-house such ad- 
justments are made after the clearing has been done. The 
bank pays for what is shown on the envelope and receives 
pay for what it turns in and makes adjustments afterward 
between the banks individually. 



CLEARINGS AND CLEARING-HOUSES 159 

By the rules of the clearing-house all checks to be re- 
turned must be sent to the bank from which they were re- 
ceived by a certain hour, and the drawee bank must, there- 
tore, determine promptly whether or not the check is to be 
paid. It is generally the function of the bookkeeping de- 
partment to ascertain if the maker is good for the amount, 
leaving it to the paying teller to pass upon the regularity 
of the check as to signature, etc. But someone in the bank 
must, in a few hours, pass upon all checks that come through 
the clearing, and failure to detect the bad will lead to loss; 
for the rules are rigid and binding, and a check not returned 
before the stipulated time may be considered paid. The 
courts have steadily recognized this rule as fair, although 
leading to hardship at times. 

In New York, every bank having a balance due to the 
clearing-house must pay the same between 12.30 and 1.30, 
and this payment must be in form suitable for reserves, in- 
cluding the clearing-house gold certificates above mentioned. 
A large part of the settlements are made with these certifi- 
cates which are in large denomination and are used only in 
clearing-house settlements. Legal tender money, gold and 
gold certificates are also used. Banks having balances due 
to them are required to appear at 1.30 and receive the 
amount. These balances are paid over by the manager and 
receipted for. The clearing-house day thus closes as it 
began, with nothing "in the till" — all that came in having 
been paid out. The medium of settlement may be different 
in different places, legal tender money always, of course, 
being acceptable. 

Clearing-House Settlements 

Settlements may be made in one of seven ways: (a) By 
checks on debtor banks, given to creditor banks and issued 
by the clearing-house manager; (b) by borrowing and loan- 
ing balances (a bank instead of taking its balance makes a 
loan of it to another bank on interest) ; (c) by the clearing- 
house certificates; (d) by drafts on another city; (e) by the 
clearing-house loan certificates; (f) by cash; (g) by the 
clearing-house "due bill," which is an evidence of debt pay- 
able through the clearing-house only, and which obviates the 
use of cash and the identification of the messenger. They 
ii 



160 THE PRACTICAL WORK OF A BANK 

are payable through the next day's clearing. Where man- 
agers' checks are used they are given to* creditor banks, and 
included in the clearings of the next day. 

Some clearing-houses make two clearings a day, one for 
over-the-counter items of the day before and the other for 
mail and other items received too late for the first clearing. 
In New York there is but one clearing, at ten o'clock. The 
items received through the bank windows are often listed 
separately, and the items received in the mails added after- 
ward, making two columns which are totaled for 
the clearing. 

Tn smaller cities the clearings are much more simple than 
obtains in New York and are often performed through a 
bank, the banks taking turns as clearing agent. In such 
cases all checks will be sent to the bank with slips to indi- 
cate the amount, and the bank, acting as the clearing-house, 
will make the same adjustments as in large cities, receiving 
from the debtor banks their drafts on New York, and pay- 
ing the creditor banks by its own draft on New York, which 
settles all the day's dealings. The clearing process under 
the latter method may look no more formal than cashing a 
check, while in New York it looks like the movement of a 
finely organized piece of machinery. 

The number of items passing through the New York 
Clearing-House is estimated at about 500,000 daily, and the 
work that precedes the clearing can easily be understood. 

Other Clearing-House Activities 

All clearing-houses exercise the clearing function and 
under necessity issue certificates, but all do not exercise the 
supervisory functions that have been mentioned, especially 
in regard to the examinations. Clearing-house examina- 
tions are merely examinations under the supervision of the 
clearing-house, usually by appointed examiners, and these 
examinations, by reason of the fact that the examiner is not 
hurried and has fewer banks to examine than the general 
run of examiners, are on a high plane of excellence; and as 
a credit man the examiner may be in closer touch with the 
borrowers of a single community than with those in a wide 
territory, and can give much valuable aid in his advisory 
capacity. Chicago and New York both have highly paid 
examiners. 



CLEARINGS AND CLEARING-HOUSES 161 

Clearing-house administration carries with it the coopera- 
tion of the banks in times of stress, the concerted action and 
the wisdom of the leaders of the banking world, who can, 
by united action, avoid disaster by their power to pull to- 
gether, the strong helping the weak. 

The clearing-house has come to fulfill other important 
functions as a regulating force, namely, regulating ex- 
change charges, uniform interest rates, and the observance 
of ethical principles in the matter of advertising. The com- 
petition of banks for business has led to the payment of 
excessive interest on deposits, to the collection of checks 
free, and other concessions that have unsettled the banking 
business, and brought all banks into competition that has 
proven unhealthy. By an agreement which is binding under 
penalty, uniformity and fairness have been established. --, 

Several attempts have been made to establish clearing- 
house bureaus of credit, where credit information could be 
assembled, classified and disseminated, but thus far nothing 
has come of it. Other regulations include the indorsement 
of checks and drafts, certification, return of paper unpaid 
and other details of management that work for the good 
of the whole. 

Clearings for Non-Members 

Banks which are not members of the clearing-house may 
have the privilege of its machinery by clearing through 
other banks, by which is meant, for instance, that if the 
First National Bank is a member and the Second National 
Bank is not (there is no compulsion as to membership, and 
some banks will not join on account of the rigid rules en- 
forced as to reserves, examinations and the costs attending), 
items on the Second National will be sent to the First Na- 
tional (its clearing agent) and all payments to the Second 
National will be made to the First National for its account. 
The fee in New York is $1,000 a year for this privilege. 

Thus, many banks in Brooklyn clear through New York 
banks by such an arrangement, and the clerks must know 
what bank acts for another in the classification of checks for 
the clearing. The clearing bank is responsible for all checks 
upon banks for which it clears. In the panic of 1907 one of 
the first signs of danger was the notice published by a clear- 
ing agent that it would no longer clear for a certain bank, 



162 THE PRACTICAL WORK OF A BANK 

and this meant that it considered the bank unsound, and 
precipitated the crisis. The simplest arrangement is for the 
non-member bank to keep account with the member bank, 
depositing all its checks in the clearing-house district with 
the clearing agent, and to which all checks drawn on it will 
be charged. 

Clearing-house rules are very strict and rigidly enforced. 
Everything is done on the dot, and fines imposed for 
offenses, as, for instance, for listing a check on the wrong 
bank, tardiness, both in presenting checks for clearing and 
for delay and errors in making totals, and in making settle- 
ments. The fines in the New York Clearing-House for 
errors are as follows : Errors on credit side of settling clerk's 
sheet, $3; errors on debit side of settling clerk's sheet, $2; 
errors in tickets, $2; errors in footing amount received, $1; 
disorderly conduct, $2 ; tardiness, $2 ; debtor bank f ailing to 
pay before 1.30, $3; errors in delivery on receipt of ex- 
changes, $1. These fines are charged to the guilty banks 
and statement rendered. 

Clearing Country Checks 

As the clearing-house settles the balances of city checks 
—in reality collecting them — so clearing-houses may act as 
clearing agencies for wider territory, the principle being the 
same. The operation of the Boston Clearing-House will 
Illustrate this principle. 

Each Boston Clearing-House bank assorts its New Eng- 
land checks into States and towns and sends them daily to 
the clearing-house, before a certain hour, together with ma- 
chine lists of the totals, for which a receipt is taken. This 
receipt is then cleared after a certain time has elapsed for 
the return of the remittances. The clearing-house clerks 
assort all the checks alphabetically as to towns and States so 
that at the end of the day a single letter containing checks 
from all the Boston banks goes to each bank in New Eng- 
land. Remittance is made at once to the manager of the 
clearing-house who then charges the drafts to the banks on 
which they are drawn. If other funds than Boston drafts 
are received, due provision is made. Ninety-five per cent, 
of all transactions are thus settled on the second day and if 
any delay should occur in the mails for a longer period, tem- 



CLEARINGS AND CLEARING-HOUSES 163 

porary adjustment is made. The clerical work and book- 
keeping entailed is very simple and altogether the plan has 
been so eminently successful that many other cities have 
adopted similar systems. The cost to the Boston banks has 
been about seven cents per thousand dollars collected. 

The Kansas City Clearing-House collects for a wider 
territory, and this will be found described in the chapter on 
checks and their collection (chapter eleven). 

The Weekly Report 

The activities of the clearing-house are many, but one of 
the chief benefits is the weekly report of condition, by which 
the standing of the banks as individuals and the banks of a 
clearing-house district, as a whole, may be accurately known. 
The average condition is reported for the week, and also the 
actual condition as of the close of the week. These fig- 
ures are published for the benefit of the public. Banks keep 
a record of the figures each day for averaging at the close 
of the week. The total clearings of the clearing-houses, of 
course, indicate the state of trade, but they do not include 
those clearings made inside the banks, and a falling off in 
clearings need not necessarily indicate slack business. Thus, 
if two large banks were to unite, they would no longer clear 
the checks on each other, but perform the clearing within 
their own organization as debits and credits to individual 
accounts, and the clearings might show a falling off, and 
the volume of business still be normal. 

Statistics are kept by all clearing-houses, and these are 
fairly indicative of the condition of business for the country. 
The volume of clearings measures, to a large extent, the 
volume of business, and is a direct public sendee. The vary- 
ing condition of the banks is also known by these reports, 
and together with the examinations already referred to, give 
the banking world information that is most beneficial to the 
interest of all concerned. Weaknesses are detected in time to 
lend support; unwise methods and unjust practices are dis- 
covered; fraud detected; inflation and misuse of bank funds 
are checked; so that the clearing-house becomes a highly 
valuable regulating force in the community. 



CHAPTER VIII. 

^ COLLECTIONS AND THE MESSENGER 

/ Collection items are to be distinguished from transit 
items, in that transit items are credited as cash, and collect- 
ed, while collection items are received for collection and 
credit. Transit items (usually checks) are treated as cash; 
the others are not until cash or its equivalent is received for 
them. Collections consist of notes, drafts, bills of exchange, 
coupons, etc., which have stated maturity, or for some rea- 
son are not to be treated as paid until proceeds are in hand. 
.(:■ Collection items may be divided into two groups: Those 
to be collected through messengers and those to be collected 
through the mails, using for that purpose the bank's regular 
correspondents, or a correspondent selected for the pur- 
pose. Items will be received from the bank's correspondents 
to be collected either in person or to be forwarded, and 
items will be deposited by the bank's own customers for like 
purpose. There will also be items held by the bank matur- 
ing from day to day that must be presented in person for 
collection, and the messenger, therefore, comes into play as 
the medium through which to make presentment and 
collection. 

The Messenger 

Even though the messenger stands well toward the bot- 
tom of the banking ladder, he is an important part of its 
machinery. He is charged with simple, yet important, 
duties. His every act is surrounded by banking law and 
precedents. It is of utmost importance that he be guided 
into proper methods in this respect, and upon his superior 
officer falls the duty of directing him aright. Inasmuch as 
he is a novice, he will simply do as he is told, and the di- 
recting officer must know what to do under many conditions 
in order to keep the bank, himself and the messenger within 
the line of duty, good banking law and practice. 

The messenger is usually a beginner in the banking busi- 
ness, and is sometimes called a "runner" — not because he 
runs, but because he is on foot most of the time, and should 

164 



COLLECTIONS AND THE MESSENGER 



165 



always make haste, if he does not run, for time is an ele- 
ment. The messenger is in the first stage of "the bank man 
in the making," and here he learns his first lessons in bank- 
ing. He is "green" and can do, or ought to do, only as he 
is told, and the banker who can direct the messenger in prop- 
er methods and keep him within the lawful rights of the 
bank and see that he does the proper thing at the proper 
time, is a good executive. 

The messenger should have all the qualities that the bank 
man of the future would be expected to have. He must 
have good health. Every bank man should have good 
health, and a sickly messenger is out of place. He should 







For Accepte nee and Return, 
Without Protest 



TO THE 

Deposit National Bank 

OU BOIS, PA. 



I 




s,Jt' $>w*£#c/-L<2> ?su,'*+-z&-\ 






TIME DRAFT FOR ACCEPTANCE AND RETURN 



have good home training. He should, if possible, live at 
home. He is generally at the period of life when impres- 
sions are made and habits formed that will make or mar his 
career as a bank man, and it is vital that home influences 
be good, for his associations will be with all classes of boys 
and men. He should be neat in person. It should be in- 
sisted upon that he have clean hands and nails, use 
the tooth brush, and generally keep himself tidy. He 
should have at least a grammar school education, be a fair 
penman, and have an aptitude for bank work. This can soon 
be determined, for if he is a round boy in a square hole, you 
don't want him. He must fit. 

To say that the messenger must be honest is to waste 
time. All men should be; but honesty being sometimes an 
ethical conclusion, what is honesty is often a matter of dis- 
pute. He should have a high regard for other people's 



166 



THE PRACTICAL WORK OF A BANK 



property. There are some men who cannot resist the sight 
of money. It is told of a certain bank clerk that the mere 
sight of money in mass sets him trembling. Such a man is 
not safe in a bank. The boy who would take a postage 
stamp without consent is treading dangerous ground. He 
may never go further, and yet he may not be satisfied with 
postage stamps, and the environment of money, the ease 
with which the officials earn it might tempt him to find a 
way or make one, and the old story repeats itself. 

The Messenger and His Valuables 

The messenger should early learn to comprehend the 
value of the paper he will carry with him. He must be 




v£"oo< 






& 3 



DO NOT HOLD THIS DRAFT 
FOR CONVENIENCE OF DRAWEE. 

IF NOT PAID ON PRESENTA- 
TION RETURN AT ONCE WITH 
REASON TO 

MANUFACTURERS NATIONAL BANK 

PHILADELPHIA. PA. 



■cXiArM- rv* >. ^V«><v ^' 



J/ZM&* 



^H— % < ^ i &^^^ 



< Sx^i 



SjJ*6,i4&u*rw5-f Watnta Stsntla/klp/llt 



DEMAND DRAFT 



careful. He will take out with him checks, notes, bills of 
exchange, securities, coupons and all sorts of valuable 
papers, for which he must account, and if no monetary loss 
occurs, it will be difficult and sometimes impossible to re- 
place them if lost. He is, therefore, usually provided with 
a stout wallet, with a good clasp, and with a chain encased in 
leather which goes around the body or wrist, to prevent loss 
or robbery. He should use it that way: but many messen- 
gers have, after a time, grown careless in such matters and 
taken long chances. 

To repeat, the messenger's principal duties consist in 
doing as he is told. He should not assume responsibilities. 
He should be sent out with explicit instructions as what to 



COLLECTIONS AND THE MESSENGER 167 

do and be held to them. He should not take in payment of 
items anything but cash or certified checks. While the 
course of business runs smoothly, it may make little differ- 
ence whether a New York draft, a check or currency is re- 
ceived in payment, either by a messenger or by a collecting 
bank; but in the event of failure of the bank making the 
collection, or the bank on which the instrument received in 
payment is drawn, questions of law arise that the collecting 
bank is bound to know. To discuss the question here would 
lead to endless quotations from courts of record all over the 
country and the reader interested in following this subject 
further is referred to works on banking law and legal publi- 
cations that treat of such matters from a strictly legal view- 
point. 

Old Employees 

The messenger is sometimes an old employee who has 
served his day at high pressure work and been given the 
rather simple occupation of messenger; or from disappoint- 
ment or incompetency in the field of other endeavor has 
become, for some reason or other, incapacitated for higher 
grade work and taken this as a last resort. Some of the 
tragedies of banking have culminated in the messenger, and 
if we could scratch beneath the surface — cut deep enough — ■ 
we would find many a broken-hearted man under the 
messenger's coat. 

In a large city, where much territory has to be covered, 
there will, of course, be various routes laid out, covering the 
maximum ground with the least waste of time and retracing 
of steps. Inasmuch as banks have to present various items 
not handled through the clearing-house over the counters 
direct, these routes are often laid out with respect to cover- 
ing the various banking institutions of the city, and as occa- 
sion requires the route is varied to include other places. 

Meeting Men 

In making collections the messenger will meet all sorts 
of men, in all sorts of occupations, and receive all sorts of 
treatment, but it is a good schooling — this meeting of men 
— and chapters might be written thereon; and those inter- 



168 



THE PRACTICAL WORK OF A BANK 



ested in the anecdotal side of this question will find many 
incidents mentioned in the chapter on the messenger in 
Patten's Practical Banking. 

The Messenger Must Account 

The messenger is charged with the items taken out, or 
memo made against them of when and by whom taken, and 
must account for the paper or turn in its proceeds when his 
trip is ended. Messengers have gone out with a batch of 
collections and never returned, and it is proper to have some 
record of what was taken out so that in case of loss, acci- 
dent or other contingency there will be a record of what 
was taken away. When carrying large amounts of cash or 



taken out for collection by 



messenger 



RECORD OF ITEMS TAKEN OUT BY MESSENGER 

valuables of any sort, the messenger is usually accompanied 
by another clerk. In some banks, especially in the smaller 
places, the janitor acts as messenger. Where clearings are 
made over the counter, the messenger is often the agency by 
which this is done. 

Knowledge of Banking Law Essential in Collections 



A knowledge of banking law and especially the law of 
negotiable instruments is indispensable to the one in charge 
of the messenger. He must know what is a regular instru- 
ment and what irregular; what responsibility he assumes 
for his bank in the dcing of certain things and what he 
should do to protect his bank under certain conditions. He 
may decide to send an item direct to the drawee bank when 



COLLECTIONS AND THE MESSENGER 169 



Guaranty Trust Company of New York 



140 Broadway 



o 

M - -~--a g 

w H cc 
A-^^^, , , ', ,. _,..z;_....g..._..H_ for $_ drawn by 

> § ffi 
- 1 , JU , . kL.....h| Epas been regularly presented at your office 

m § ° 
for payment. It will be held by Collection fjfepagmegt until 3 o'clock this day. 

H K o 

m ^ WM. C. EDWARDS, Treasurer. 

« 5 
New York.^^™ „=,_ by 



-: NOTICE LEFT BY MESSENGER WHEN DRAWEE IS NOT FOUSD 

another bank is in existence in the same town, and not know- 
ing the law involve his bank in loss. 

He can make no better use of his spare time than to 
study case law; for what happened in one bank may happen 
in another; and case law being simply the result of errors 
made, he can avoid the same errors by knowing the result 
of other like errors. There are many cases arising out of 
collections. By being a thoughtful collection man he can not 
only make money for his bank, but save money for it, and it 
is as important to avoid losses as it is to make profits. 

A Little of the Law of Collections 

The collection of a note is governed by law so strict that 
careful attention must be given the timing, the presentation, 
the protest and the notice of protest, and the form of money 
that is accepted in payment. The law does not recognize 

?rof^f^^-oJL^ULC^Aj 




DO MOT PROTEST THI5 ITEM 



1 Please remove this slip /rout the item before it 
is presented for payment. 



If not paid,- return at once, with reason, to 

THE CLEARFIELD NATIONAL BANK, 
CLEARFIELD. PA. 




rPr*t wttarut. chunje the. same fa account aT 



TIME DRAFT "NO PROTEST" 



170 THE PRACTICAL WORK OF A BANK 

payment in any other form than cash, but the custom among 
the New York banks is to accept a certified check on a 
clearing-house bank drawn to the order of the collecting 
bank; or if drawn to a third party and duly indorsed, the 
indorsement must be known to the bank which accepts it. 

Briefly stated, the law in regard to presentation is that 
a note must be presented at the place where it is made pay- 
able, if such a place is named. If not stated, at the maker's 
place of business, if known, or at his residence or at any 
place where he may be found on the day of maturity. Bank- 
ing customs make the hours from 10 A. M. to 3 P. M., but 
it is often very convenient to fall back on the law which 
permits the presentation at a later hour when the occasion 
requires. In protesting a note which bears an indorser it is 
absolutely necessary that it be presented by a notary pub- 
he of record on the day the note falls due, and that notices 
of such protest be sent to all parties concerned and such no- 
tices must be mailed by an early mail on the day following. 
This protest holds all the indorsers in turn, but it is not 
necessary to protest to hold the maker, although it is best 
to have a note protested, as it is a sworn statement beyond 
dispute in case of a suit that the note was presented and 
refused at the place of payment on the due date. 

By the Negotiable Instruments Law in force in forty- 
six States and territories, protest is necessary only on for- 
eign bills of exchange — checks, notes and bills drawn in one 
State and payable in another; but as a common banking 
practice protest is made of all instruments that are not paid. 

The purpose of protest is to hold the indorsers, for un- 
less protest is properly made the indorsers are discharged. 
And when properly protested the paper needs no other evi- 
dence in court as to having been presented for payment. To 
be on the safe side some banks protest all paper that is un- 
paid, unless specifically instructed to the contrary. But be- 
fore protest is made, all due effort should be made to reach 
the party on whom drawn and be certain that payment has 
been refused before resorting to protest. Protest of checks 
is, of course, a common matter, and presentment to the 
bank drawn on and refusal to pay is all that is necessary to 
make protest warranted. 



COLLECTIONS AND THE MESSENGER 171 

Sending Collections Directly to Drawee Banks 1 

1. Collecting Bank Guilty of Negligence in Sending 
Chech to Drawee. — In the collection of checks deposited 
with it a bank frequently finds it convenient, if not neces- 
sary, to send them directly to the banks on which they are 
drawn. The collecting bank may have no correspondent at 
the place where the drawee of a check, deposited with it for 
collection, is located. The drawee bank may, in fact, be the 
only bank at that place. The collection of a check through 
the medium of intermediate or correspondent banks might 
involve sending the check over a circuitous course, which, 
in addition to consuming time might actually jeopardize the 
chances of successful collection. Exchange charges some- 
times influence the bank as to the manner in which the col- 
lection is conducted. These and other considerations, in the 
eyes of the banker, are often deemed sufficient reason for col- 
lecting a check, placed with him by a depositor, by sending 
the check directly to the drawee bank. 

There are undoubtedly many instances in which a bank- 
er would consider any other method of collection opposed 
to good banking. But, in the making of such collections, 
the banker must take into consideration the fact that the 
courts have evolved certain rules of law, by which to deter- 
mine who shall bear the loss, when a loss occurs in the col- 
lection of a check. And these rules sometimes conflict with 
the banker's idea of the proper way to collect a check. 

The courts lay down the rule that, where a bank receives 
a check for collection, and through its negligence the check 
is not collected, it is responsible for the amount of the loss 
to the owner of the check. No one can doubt the sound- 
ness of this doctrine. The courts go further and declare 
that the sending of a check by a collecting bank directly to 
the bank on which it is drawn amounts to negligence and 
renders the collecting bank liable to its depositor in the event 
that the collection is not made. Bankers may doubt the 
fairness, as well as the soundness, of this doctrine. But the 
rule is so well established in this country that time spent in 
doubting it in any manner is wasted. 

With the exception of New York, every State in which 
the question has arisen has held that the sending of a check 

iJohn Edson Brady in the April, 1914, Banking Law Journal. 



172 



THE PRACTICAL WORK OF A BANK 



directly to the drawee bank is negligence on the part of the 
collecting bank. As the courts see the situation, the loss in 
such a case usually occurs because the drawee bank sends its 
own paper in payment of the check and fails before the 



please advise payment or non-pay- 
\ ment by telegraph, =teteffigBg~mqrfr 
► as sqoi\ as paid or refused — to 
% Bank of Montclair, 

MONTCLAIR, N. 4. 




forth 3 <J Street. 




^ lflcAJuJU±^~ 



so 



"g^. **t. ^K^^Jt. 



It*ma*/2Hun,JW 



ITEM FOR COLLECTION WITH INSTRUCTIONS TO "WIRE NON-PAYMENT^ 



same is presented for payment; if the check had been sent 
to a correspondent bank, it might have been presented be- 
fore the failure of the drawee, paid in cash, and remitted for 
by the correspondent. It matters not that loss might also 
occur, even by making the collection through a correspond- 
ent; this does not enter into the question. 

The rule, which makes it negligent for a collecting bank 
to send a check directly to the bank on which it is drawn, is 
generally placed on the ground that, in so doing, the collect- 
ing bank makes the debtor an agent for the purpose of col- 
lecting the debt. 

The reason is expressed as follows in the case of German 
National Bank v. Burns, 12 Colo. 539: "Even if we can 
conceive of such an anomaly as one bank acting as the agent 
of another to make a collection against itself, it must be 
apparent that the selection of such an agent is not sanc- 
tioned by businesslike prudence and discretion. How can 
the debtor be the proper agent of the creditor in the very 
matter of collecting the debt? His interests are all adverse 
to those of the principal. If the debtor is embarrassed, 
there is the temptation to delay; if wanting in integrity, 
there is the opportunity to destroy and deny the evidence of 
the indebtedness." 



COLLECTIONS AND THE MESSENGER 173 

The following cases support the rule that it is negligence 
for a bank to send a check, entrusted to it for collection, di- 
rectly to the drawee and indicate how firmly the rule is 
fixed: Lowenstein v. Bresler, 109 Ala. 326; German Na- 
tional Bank v. Burns, 12 Colo. 539; Drovers' National 
Bank v. Anglo-American Packing and Provisions Com- 
pany, 117 111. 100; Anderson v. Rodgers, 53 Kans. 542; 
First National Bank v. Citizens' Savings Bank, 123 Mich. 
336; Minneapolis Sash and Door Company v. Metropolitan 
Bank, 76 Minn. 136; American Exchange National Bank 
v. Metropolitan National Bank, 71 Mo. App. 451 ; Western 
Wheeled Scraper Company v. Sadilek, 50 Neb. 105; Na- 
tional Bank v. Johnson, 6 N. D. 180; Wagner v. Crook, 
167 Pa. 259; Hazlett v. Commercial National Bank, 132 
Pa. 118; Harvey v. Girard National Bank, 119 Pa. 212; 
Merchants' National Bank v. Goodman, 109 Pa. 422; Givan 
v. Bank of Alexandria, Tenn., 52 S. W. Rep. 923; Win- 
chester Milling Company v. Bank of Winchester, 120 Tenn. 
225; First National Bank v. City National Bank, 12 Tex. 
Civ. App. 318; First National Bank v. Fourth National 
Bank, 56 Fed. Rep. 967; Farwell v. Curtis, 7 Biss. 160, 
Fed. Cas. No. 4, 690; Jefferson County Savings Bank v. 
Hendrix, 147 Ala. 670, 1 L. R. A., N. S., 246; Farley Na- 
tional Bank v. Pollak & Bernheimer, 145 Ala. 321 ; Carson 
v. Fincheiyl29 Mich. 687; Bank of Rocky Mount v. Floyd, 
142 N. C. 187. 

In some of the cases the bank in which a check is de- 



% s ve^ JZtjj^ ^fr ^ Sk^^^. ^_< 



; , NO PROTEST. ^;^f^li-£j^ 

» | Kindly remove this slip before presenting item. I f/ 

| , 1 

S If not paid when due, please ■ ADVISE a a Cw ^ r <». 

return at once, with reason, to m PAYMENT. Uk>^«^J^>Njt_gk.^ i-g-^v-^-A^j' 



THE FARMERS NATIONAL BANK 
Rome, N. Y. 







v z . ; <§>,-£s. jvU-w^ 



'i„Tto" XH Mark* St fhjn/i/lfiltw. 



PROMISSORY NOTE, IN PROCESS OF COLLECTION 



174 THE PRACTICAL WORK OF A BANK 

posited for collection escapes liability to the depositor for a 
loss resulting from sending the check directly to the drawee 
bank, by reason of another bank intervening between it and 
the drawee. That is, the initial bank, instead of mailing the 
check to the drawee, forwards it to a suitable correspondent 
bank, which in turn sends it to the drawee. The corre- 
spondent bank is then held to be the agent of the depositor 
and not of the forwarding bank, and the latter is not re- 
sponsible for the default of the correspondent. Givan v. 
Bank of Alexandria, Tenn., 52 S. W. Rep. 923, is a case 
of this kind. The plaintiff deposited in the defendant bank 
two checks on the bank of A. Byram & Company, of Water- 
town, Tenn. On the same day the defendant bank for- 
warded the checks to the First National Bank at Nash- 
ville. This bank sent the checks directly to the drawee bank, 
but they were never paid, because of the drawee's suspen- 
sion. 

Although the court stated that the Nashville bank was 
guilty of negligence in sending the checks directly to the 
drawee, it was held that the defendant bank was not liable 
for that default. The court said: "Assuming, then, that un- 
der the rules stated the check may be sent to the place of 
payment through intermediate banks, it follows, under the 
rule, that the initial bank discharges its duty to the person 
who deposits the check for collection if such intermediate 
bank or banks are suitable persons for the performance of 
the business; and, in event such proper selections are made, 
such intermediate bank or banks, down to the last one in the 
chain, become the agents of the owner of the paper, and re- 
sponsible to him as such." 

Many of the States hold, contrary to the rule here ex- 
pressed, that the initial bank is liable to its depositor for 
losses occurring through the negligence or default of a cor- 
respondent bank, to which a check is sent for collection. 

2. The Rule in New York. — The State of New York 
stands alone in this country in its opposition to the general 
rule, under which a bank is deemed guilty of negligence in 
sending a check directly to the bank on which it is drawn. 
But even in New York there is no decision of the highest 
court, deciding the question squarely. 

The case of Mcintosh v. Tyler, 47 Hun (N. Y.) 99, 
was an action by the payee of a check against its drawers. 



COLLECTIONS AND THE MESSENGER 175 

The check was deposited by the plaintiff in a bank for col- 
lection, and the bank in which it was so deposited sent it 
directly to the bank on which it was drawn. The drawee 
bank charged the check to the drawer's account and stamped 
it paid. A draft on New York for the amount of the check 
was filled out, but was not signed and was subsequently de- 
stroyed. At the close of the day on which the drawee bank 
received the check it suspended business. It was held that 
the drawer was liable to the payee on the check, the court 
saying: "The fact that a check mailed by the holder to the 
drawee for payment is not paid, when it would have been 
had it been presented at the payee's counter, is not, it seems, 
in this State, a defense in favor of the drawer, though by the 
transaction the drawer lost his deposit, though it has been 
held otherwise." 

While this was an action against the drawer of the check, 
brought by the payee, and not by the holder against a bank 
in which the check was deposited for collection, it has been 
generally accepted as an authority for the proposition that a 
bank in which a check is deposited for collection is not 
guilty of negligence in forwarding the check directly to the 
drawee for payment, and is not liable to the holder, by whom 
the check was deposited, for a loss occurring therefrom. 

This New York decision is based on the authority of two 
earlier New York cases, Indig v. National City Bank, 80 
N. Y. 100, and Briggs v. Central National Bank, 89 N. Y. 
182. Referring to these cases it is said in a note in 27 L. R. 
A. 248: "Careful analysis of these New York cases, there- 
fore, shows that there is no direct decision of the court of 
last resort upholding the practice of mailing checks directly 
to the drawee. On the contrary, there is a mere expression 
not necessary to the decision in the Indig case approving 
the practice of mailing a note to the bank at which it is pay- 
able, and a recital of this decision in the case of Briggs v. 
Central National Bank, 89 N. Y. 182, as if it were the case 
of a check mailed to the drawee. Therefore the decision of 
the general term of the supreme court (Mcintosh v. Tyler, 
supra) denying the doctrine of the other States in reliance 
on the authority of these two cases is in itself the only direct 
authority in New York State to that effect. This decision 
itself is weakened by the fact that it is based on cases which 
do not exactly support it." 

12 



176 



THE PRACTICAL WORK OF A BANK 



3. Where There is No Other Bank in Town Where 
Drawee is Located. — What is a bank to do when it receives 
for collection a check drawn on a bank where there is no 
other bank in the same town? The law leaves the bank no 
alternative but to collect the check through the medium of 
an express company, if it has an agency at that point, or 
send a special messenger with instructions to collect the 
check in cash over the drawee's counter. Possibly the 
best plan would be to enter into an express agreement 
with the depositor of the check, giving the bank authority 




RETURNED 

UNPAID 

Ticked. U Known. 



_ Cheek Sent 
Amount Paid 
Will Ramlt 
. Will Writ* 
R* Requested 
Date 
Refused 



^ **^; + +oQ. J 



MOM TBS 

Protested 

First -National Bank/^V* - &SXE£ 

_ Rot Sufficient/'" 

Norwich, Conn. 5S[£S , 5S3SSSJ 



J<- vNojU^7g>ouaiU / vftCo-*>JUrcle^ <?»» 



Bms<hr.5*i warn Sou 



to— 






SilMutg SmfibrSfi WabiM fo^Hfafefoto?., 



NOTE RETURNED UNPAID REASON CHECKED 



to send the check to the drawee direct, and releasing it from 
any liability for loss resulting therefrom. At any rate, if 
the bank sends the check directly to the drawee, without ex- 
press instructions to do so, it is guilty of negligence, just as 
it would be in a case where there is more than one bank in 
the town in which the drawee is located. 

Some of the writers on this branch of the law have ex- 
pressed the opinion that there is an exception to the general 
rule in the case where the drawee is the only banking in- 
stitution in its town, but no support for this view is found 
in the authorities. 

The case of Minneapolis Sash and Door Company v. 
Metropolitan Bank, 76 Minn. 136, involved a check drawn 
on the only bank in a certain town. On the trial the plain- 
tiff was allowed to show that it was usual and customary for 
banks to send checks and drafts, payable by other banks at 



COLLECTIONS AND THE MESSENGER 177 

distant points, directly to the drawee by mail, provided there 
was no other bank of good standing in the same town. 

In the opinion it was said: "We fail to see what possi- 
ble effect upon a case of this kind the fact that the drawee 
is the only bank in good standing in the town can have upon 
the duty of a bank which undertakes a collection. Any rea- 
son for such a course is equally as sound where there are 
two or more banks in the town as where there happens to 
be but one. * * * We cannot agree with counsel that the 
usage and custom here relied upon is a defense to the claim 
that the defendant was negligent when forwarding the check 
to the Mapleton Bank (drawee) for presentation and pay- 
ment. As a general rule usage and custom will not justify 
negligence. It may be admitted that such a course is fre- 
quently adopted, but it must be at the risk of the sender, 
who transmits the evidence of indebtedness upon which the 
right to demand payment depends, to the party who is to 
make the payment. Such a usage and custom is opposed 
to the policy of the law, and is unreasonable and invalid." 

Another such case is Pinkney v. Kanawha Valley Bank, 
68 W. Va. 254. It there appeared that, on September 25, 
1900, the plaintiff Pinkney received a check, payable to his 
order, which he deposited in the defendant bank for collec- 
tion. The drawee of this check was the only banking insti- 
tution located at that point. On the following day the de- 
fendant sent the check to the drawee by mail, with instruc- 
tions to ship the amount, for which it was drawn, in cur- 
rency. The currency was not shipped and the drawee bank 
subsequently closed for good. 

In its defense the defendant bank claimed that, under 
the circumstances, and in view of the fact that there was no 
other bank at the place where the drawee bank was located, 
it was not negligent in sending the check directly to the 
drawee. It was argued that, as the plaintiff had been a 
customer of the defendant bank for years, and accustomed 
to do business in Charleston, where the defendant bank was 
located, and, as he lived at Montgomery, where the drawee 
bank was located, and knew that the drawee was the only 
bank at that point, he was chargeable with knowledge of 
the custom on the part of the bank to send such checks, 
directly to the drawee, and was bound thereby. The court; 
however, held that an exception to the general rule, which 



178 THE PRACTICAL WORK OF A BANK 

makes it negligence to send a check directly to the drawee, to 
be applied in cases where there is no other bank at the place 
where the drawee is located, is contrary to the weight of 
authority and reason. 

The defendant in Wilson v. Carlinville National Bank, 
187 111. 222, was a depositor in the plaintiff bank and the 
action was brought to recover the amount of a check which 
he had deposited and which he had been allowed to draw 
against, the check being afterwards dishonored. The facts 
concerning the collection were these: On June 1st, 1893, 

t cash item. NO PROTEST. 



KindJy remove this slip before presenting item. 
If Dot paid give reason. 



^) . ^>*-CL^-^tf 



COWLITZ COUNTY BANK, _. 

Kalama, Wash. ^A-uK ^Oi^vv, 



iiJ o- 3, Jr. Q. $±<^K: 

CASH ITEM WITH "NO PROTEST" SLIP ATTACHED 

the defendant deposited in the plaintiff bank a check for 
$300, drawn on the Citizens' Bank of Gillespie, Gillespie 
being a nearby town. The amount was subsequently with- 
drawn by the defendant. On the day of receipt the check 
was sent to the plaintiff's St. Louis correspondent. That 
bank sent it to a Chicago bank which sent it directly to the 
drawee, by which it was received on June 5th. On the 7th 
the drawee sent its draft on St. Louis for the amount of 
the check, but payment of the draft was refused because 
of the failure of the Gillespie bank on the 8th. Illinois is 
one of the States which holds that a bank in which a check 
is deposited for collection is not liable to the depositor for 
the default of a correspondent bank, where it uses due care 
in the forwarding of the check and in the selection of a 
bank to handle the collection. The defendant contended 
that, if the plaintiff bank knew that its correspondent, by 
itself or through another bank, would send the check direct- 
ly to the drawee, which it appears was the only bank at that 



COLLECTIONS AND THE MESSENGER 179 

point, then the plaintiff did not act with reasonable care in 
the selection of its correspondent and should bear the loss. 

It was held, however, that since the depositor was aware 
of the fact that the drawee was the only bank at Gillespie he 
was estopped from claiming that the plaintiff was negli- 
gent in sending the check forward for collection in accord- 
ance with the custom in such cases. The reasons are found 
in the following statement taken from the opinion: "The 
evidence further sufficiently established that appellant (de- 
positor) knew there was but one bank in Gillespie, namely, 
the Citizens' Bank, upon which the check he held was drawn. 
It was also shown by the proofs that the appellant had, on 
prior occasions, deposited with the appellee bank (plaintiff) 
other checks on out-of-town banks, and availed himself of 
the facilities offered by the system adopted and in vogue 
only among banks and bankers for the collection of that 
class of paper. He may not have known the details of the 
system or custom in force among banks for the collection of 
such checks, but he knew the collection was to be made, 
without expense to him, through banks cooperating togeth- 
er, in compliance with certain usages and customs existing 
between such institutions to enable such collections to be so 
made. He knew there was but one bank in Gillespie, and 
that the one on which the check was drawn. The coopera- 
tion of that bank was essential to the operation of the mode 
of collection of the check; for there was no other bank at 
Gillespie to act in the matter. With this knowledge the 
appellant accepted the benefit of the facilities for the collec- 
tion of his check which the banks held out to their customers. 
The usages and customs thus availed of by appellant con- 
templated the sending of the check directly to the bank on 
which it was drawn, there being no other bank at that point. 
The appellant having knowledge that there was but one 
bank at Gillespie, and that his check was to be collected 
without cost or expense to him, through the medium of busi- 
ness usages and customs in force only between banks and 
bankers, could not be permitted to accept the facilities thus 
afforded by the appellee bank for his accommodation, and 
afterwards insist that compliance by the appellee bank with 
the usages and customs, the benefit whereof he sought to 
avail himself of, should constitute actionable negligence." 

This case is, therefore, not a direct authority for the 



i 



130 



THE PRACTICAL WORK OF A BANK 




SIGHT DRAFT RETURNED UNPAID WITH REASON INDICATED 

proposition that a bank, in which a check is deposited for 
collection, may forward the check directly to the drawee, if 
it appears that the drawee was the only bank at that place. 
It holds merely that the bank, in which the check is deposit- 
ed, is not liable to the depositor, where it sends the check to a 
correspondent bank, by which it is forwarded to the drawee 
bank, in a case where it is shown that the depositor knew 
that there was no other bank at the place where the drawee 
is located and was aware of the fact that the check would 



Returned to No. 



-by 



Guaranty Trust Co. of New York 



FOR REASON MARKED X 



Guarantee of Endorsement 

Pilling 

Signature Incorrect 

Endorsement of each Payee 

Signature Missing 

Missing Endorsement 

Sent Wrong 



Date 

Guarantee of Amount 

No Account 

Insufficient Funds 

Account Closed 

Written Official Endosement 

Bank Stamp 



SLIP ATTACHED TO RETURNED ITEMS GIVING- REASON FOR THE RETURN 



COLLECTIONS AND THE MESSENGER 181 

be collected without expense to him through other banks in 
accordance with banking usages. 

Where the depositor assents to the sending of the check 
straight to the drawee, the bank will not be held liable. The 
plaintiff bank, in the case of First National Bank v. Citi- 
zens' Savings Bank, 123 Mich. 336, sent to the defendant 
bank for collection a certificate of deposit, issued by D. F. 
Parsons, a private banker at Burr Oak, Mich. The certifi- 
cate was accompanied by the following letter: "We send 
this C-D for $165,000 and int. to you for collection, as we 
note that you have a correspondent at Burr Oak, Mich. 
Please collect for us at your best rate of exchange and 
oblige." The defendant's correspondent was the banker by 
whom the certificate was issued, and as there was no other 
bank or banker at Burr Oak, the certificate was forwarded 
to him direct. The certificate was not collected, owing to 
Parsons' failure after the receipt of the certificate by him. 
It was held that the letter sent to the defendant by the 
plaintiff, along with the certificate of deposit, was equiva- 
lent to an instruction to send the certificate directly to 
Parsons. 

4. Effect of Custom to Send Checks Direct to Drawee 
Banks. — Custom will sometimes sanction a practice which 
would otherwise be declared invalid. But the fact that it is 
customary to send checks directly to a drawee bank for col- 
lection does not render such practice proper in the eyes of 
the law. The question was raised in the case of Farley Na- 
tional Bank v. Pollak & Bernheimer, 145 Ala. 321. The 
plaintiffs deposited a check for collection and the bank in 
which it was deposited forwarded it directly to the drawee, 
which sent back a draft on New York for the amount of 
the check. The draft was not paid on presentment because 
of the failure in the meantime of the bank on which the 
check was drawn. 

In disapproving the custom among banks to send checks 
deposited for collection directly to the banks on which they 
are drawn, the court said : "It may be admitted that a party 
committing a paper to a bank for collection may be bound 
by a custom which is reasonable and sufficiently general to 
presume that it is known. * * * Undoubtedly an agent who 
undertakes to collect a claim, although by custom he may be 
allowed to employ sub-agents, yet is certainly bound to select 



182 THE PRACTICAL WORK OF A BANK 

his sub-collecting agents with judgment and care, and one 
of the first elements of care is to select a sub-agent who 
is not adversely interested in the subject matter. What 
would be the use of a party placing his claim in the hands of 
a bank for collection, if that duty could be performed by 
merely indorsing the paper by mail to the party who is 
obligated to pay it and receive his check on New York? 
The owner of the paper could send it directly and receive 
his New York exchange in much less time. A custom must 
be reasonable, and the best considered cases hold, not only 
that the bank or party who is to pay the paper is not the 
proper party to whom the paper should be sent for collec- 
tion, but also that a custom to that effect is unreasonable 
and bad." 

Such a custom, however, has been held valid, as applied 
to a check made payable to the order of the collecting bank. 
Kershaw v. Ladd, 34 Oregon 375. The plaintiff sent for 
collection to the defendants, who were bankers at Portland, 
a check drawn on a bank at Sheridan, Oregon, fifty miles 
distant from Portland. The check was drawn by the plain- 
tiff and was payable to the order of the defendants. It was 
received by the defendants on the 16th and forwarded di- 
rectly to the drawee bank on the same day, by whom it was 
received the next day. On the 23d the drawee drew a draft 
on its correspondent at Portland, which it sent to the de- 
fendants on the 24th, and which was received by the defend- 
ants on the same day. On presentment payment was re- 
fused for the reason that the Sheridan bank had closed its 
doors on the 24th. It appeared that there was a reliable 
express agency at Sheridan and that there was also another 
bank located there. The bank, however, had been doing 
business for a short time only and it was not shown that the 
defendants had any knowledge of its existence. 

The parties agreed that there was a well established cus- 
tom among the banks of Portland to the effect that, when a 
bank received for collection an ordinary check, drawn on a 
bank in another place, the collecting bank would forward the 
check directly to the drawee for collection and returns, pro- 
vided that the collecting bank had no agent or correspond- 
ent at the place where the drawee bank was located. 

It was held that this custom was reasonable, in so far, at 



COLLECTIONS AND THE MESSENGER 183 

least, as it applied to an unindorsed check, payable to order 
of collecting bank. 

Endorsements. 

The question of endorsements is one of considerable im- 
portance. Up to 1898 the restrictive form of endorsement 
was used on all items whether taken as cash or for collection, 
the form generally reading "Pay to the order of receiving 
bank for collection, for account of sending bank." The 
matter of bank endorsements was revolutionized by the now 




Farcers & Mereiaats Bsafc. 

Argyle, Minn. 



QUA- O r V oo tJ - < UL *"£**' 



^J^~ ^°*- MtLr^cL c^U/ ~g_. 



i only on jeaumtnl at or- °'««' 

S - Receipted Elll 

I ti0ptnn.\T~of lha draft. Policy 

J Certlft_ie 



^ %T JV/__ U^s^ 




^/tnt/ma-iac '/mMm&^.aazK 



^ <^ 



_______ JVuxr 'Ujy^JU 



l %>^aaaJ^. 



2z.rr\t>* 



; >V^__> 



DRAFT WITH BILL OF LADING ATTACHED "ARRIVAL DRAFT. 



famous decision in National Park Bank v. Seaboard Na- 
tional Bank, 114 N. Y. 28. In this case a check drawn on 
the National Park Bank for $18 was raised to $1,800 and 
sent to the Seaboard Bank for collection and credit and en- 
dorsed "for collection only." The check was paid by the 
Park Bank for $1,800 and later it was discovered that it was 
raised. The Park Bank sought to hold the Seaboard Bank, 
which had turned over the proceeds to its correspondent, the 
account having been closed. It was held that neither the 
Seaboard Bank nor the bank sending to the latter was liable 
under the restrictive endorsement. 

The case created considerable excitement in banking 
circles and led to the widespread use of unrestricted endorse- 
ments, making the endorsers liable as such on all items. The 
New York Clearing-House abolished all restrictive endorse- 



184 THE PRACTICAL WORK OF A BANK 

ments on paper passing through its channels. The rule has 
been adopted throughout the country. 

In handling collections banks should exercise due care in 
selecting agents. The Supreme Court of the United States 
lays down the general rule of law to be that the initial bank 
it liable for such damage as has been sustained by the negli- 
gence of its sub-agent or collecting bank. This rule is mod- 
ified in many of the States and is as follows: "The initial 
bank, if it selects as an agent one who is competent and 
worthy of trust and transmits the paper to him, its duty is 
done, and the owner of the collection must look to the sub- 
agent for any default of which he is guilty." 

A bank, however, may vary its contract by express agree- 
ment, and this banks seek to do by printed notices on their 
deposit tickets, or on the inside cover of pass-books, to the 
effect that the bank assumes no responsibility for the collec- 
tion of any item beyond due care and diligence in the selec- 
tion of collecting agents, and that items are taken at the 
risk of the customer and that the bank will not be respon- 
sible for any loss through failure or default of the bank's 
agent. (See chapter on Receiving Teller.) 

The above case held that the bank receiving paper in- 
dorsed to it "for collection" was a mere agent and not re- 
sponsible for genuineness after paying over the proceeds 
to its principal. The rule adopted by the New York 
Clearing-House and substantially followed by the other 
clearing-house associations throughout the country exclud- 
ing all restrictively endorsed paper unless guaranteed, ap- 
plies only to items collected through the exchanges. Usually 
these items represent cash, having been received on deposit 
and credit given therefor, or the cash paid out at once, by 
the initial bank; the exceptions being collection items in the 
form of notes or acceptances made payable at a bank, or an 
occasional check. 

While the strict language of the resolution adopted by 
the New York Clearing-House Association limits the opera- 
tion of the rule to items collected through the exchanges, yet 
in all of the principal cities where banks are located which 
do collecting for other banks, these collecting banks have 
quite generally set their faces against restrictive endorse- 
ments for the reason that they wish to be protected in any 
contingency which might arise, by the warranties that go 



COLLECTIONS AND THE MESSENGER 



185 



with a general endorsement. Some authorities insist, how- 
ever, that a bank in acting as the agent in the collection of 
items should never assume the warranties of a general en- 
dorser. This contention would more naturally appeal to 
country bankers, and an argument in support of the restric- 
tive form of endorsement is given briefly, as follows: It is 
a settled principle of law that in the absence of an indica- 
tion to the contrary, the form of the endorsement controls 
the title or ownership to negotiable paper. The title to or 
ownership of an item left with a bank for collection remain- 



Report by N< 

We enclose for collection and remittance 



Union Bank & Trust Company 

Jackson, Tenn., 



1S1_ 



AMOUNT 



fete sad N*, 



Items $10.00 and under no protest 

Protest items not marked X. 

Deliver documents only on payment of items. 

Telf eraph non-payment of items over $50000.; 



COLLECTION LETTER 



ing in the customer and the bank's relation being simply 
that of an agent, this form of endorsement gives to all par- 
ties through whose hands it passes, notice of this owner- 
ship, and that the collecting bank or its agents acquire no 
title therein. 

Where a collecting bank has notice that the prior bank 
has no interest in an item transmitted for collection and 
that it is acting merely in the capacity of an agent, the col- 
lecting bank cannot under any circumstances retain the pro- 
ceeds as against the true owner. But where the collecting 
bank has not notice and the prior bank is indebted to it in 



186 THE PRACTICAL WORK OF A BANK 



AMOUNT WHERE PAYABLE PUE ENDORSER 



Original, goes with the item. 

PROTEST if not paid. 



THE FAVOR OF PROMPT RETURNS IS REQUESTED UPON THE ITEM HEREWITH ENCLOSED FOR COLLECTION. 

RESPECTFULLY, IRVING NATIONAL BANK 
NEW YORK. 



PAYER AMOUNT WHERE PAYABLE DUE 



Acknowledgement , returned to bank, 



Above itern received and entered far collection, - 



PLEASE SIGN AND RETURN BY FIRST MAIL To Irving National Bank 

New York. 



DATE SENT | PAYER I AMOUNT | WHERE PAYABLE I DUE I ENDORSER 



I I | j |— 

Held in bank until item is paid. Sent to custo mer. 

Date Advised Paid 
CREDIT BILLS DISCOUNTED. 



DEBIT 



DATE SENT | PAYER | AMOUNT | WHERE PAYABLE | DUE | '"' ENDORSER 



This copy forms the charge ticket to the collecting bank. 



COLLECTION LETTER FOR BANKS OWN PAPER THREE CARBONS AND ONE ORIGINAL 

general balance, in the event of the failure of the prior bank, 
it is generally held that the collecting bank can hold the pro- 
ceeds of a collection against the true owner. The right of 
lien rests upon the further consideration, viz., that in 
the case of negotiable paper one who successfully enforces 
a lien must be a holder for value and without notice. In 



COLLECTIONS AND THE MESSENGER 187 

* 

most of the States, in fact, in all of the States which have 
adopted the Negotiable Instruments Law (Wisconsin ex- 
cepted), an antecedent or preexisting debt constitutes value. 
The qualification without notice expressed in full is "with- 
out notice of equities existing between prior parties." 

It may be contended that these considerations are of in- 
terest to the customer of a bank rather than to a bank, and 
that the customer should safeguard his own interests by 
using the appropriate form of endorsements on his collec- 
tion items, rather than expecting the bank to protect 
these interests for him. It may also be claimed that where 
the customer leaves an item for collection endorsed in blank, 
or to order, and the item is sent direct to the collecting bank, 
that in the event of default by either bank, the position of 
the customer will not be improved by the mere fact that the 
sending bank had endorsed the item restrictively. As to the 
latter contention, we answer that neither is the position of 
the bank or its customer made worse by the use of the 
restrictive form of endorsement, and that where one or more 
banks intervene between the initial and the collecting banks 
in the chain of transmission, the rights of the bank and of 
its customer are preserved, by the use of such endorsement 
in any contingency which may arise. 

As to the first contention, a bank has items to be col- 
lected which belong to it, viz.: discounted bills or notes. 
It will surely not be denied that its duty to its stockholders 
makes it incumbent on a bank to take every precaution in 
the collection of this paper, so as to protect the bank against 
possible loss. As this is the course which prudence dictates 
in such a case, and as it is the duty of the bank as agent to 
act as a prudent man would in his own affairs, it becomes 
its duty in the forwarding of items left for collection to use 
that form of endorsement which will best preserve the rights 
of a customer in possible contingencies which might arise. 
There is perhaps no better general rule of business policy 
for a bank to adopt in the management of its collection de- 
partment than that quoted as the measure of its legal duty, 
and if a bank uses "ordinary care and diligence," always 
"keeping in mind the best interests of its principal," its suc- 
cess in holding old and in securing new business should be 



188 THE PRACTICAL WORK OF A BANK 

assured; provided, of course, that it is in a position to collect 
as cheaply as will its competitors. 2 

The Machinery of Collections 

.Collections consist of all forms of commercial paper and 
include many items which are not commercial paper, strictly 
speaking. A bank may handle under this classification in 
the course of a year's business, bonds, coupons, notes, mort- 
gages ; sight, demand, time, domestic and foreign drafts ; bill 
of lading drafts, every known form of insurance claim and 
voucher; certificates of deposit, checks and bank drafts, 
checks on savings accounts with pass-books attached; muti- 
lated coin and currency, foreign money, even pawn tickets 
and tickets for winnings on races and prize fights. 

Checks are payable on demand ; time items when due, as 
indicated on the face. If they are sent for acceptance before 
due, the drawee writes the word "accepted" and his name, 
when the item is held until due and presented for 
payment. Sight drafts are payable on presentation. They 
may be paid by accepting, payable at the bank, and this is; 
authority for the bank to charge the customer's account and 
remit. 

A "city collection" is one which is to be presented by the 
messenger. A foreign collection is one to go through the 
mails, the holding bank being simply a link in the chain of 
collection. If an item subject to protest is lost it may be 
protested by a description, so it becomes needful that the 
record be complete as to details. Banks should follow the 
advice of their correspondents in the matter of protest, and 
banks should indicate their wishes in the letter accompany- 
ing the item. Protest where protest is instructed; and if 
there is an indorser who would be released if protest were 
not made, the item should be protested. Unpaid items 
should be returned promptly; advice given of paid items; 
or remittance for the same the day received, and indirect 
routing avoided in collection items. If items are returned, 
always give the reason. Time drafts should be presented 
promptly for acceptance. 

The items which a bank handles may be divided into two 

2 Pamphlet on Clearing-House, etc., issued by American Institute of Banking. 



COLLECTIONS AND THE MESSENGER 



189 



mVING NATIONAL BANK 

NEW YORK. 



D I • PO • I T I 



This copy goes to the customer 



IRVING NATIONAL BANK 

NEW YORK. 



date received number 



I * P O • I T I O I 



This copy goes to the bo 



bkkeeper. 



IRVING NATIONAL BANK 

NEW YORK 





OATt RECEIVED 




P A T E B 


AMOUNT 


DUE 


I 8 » O 8 1 





















MATURITY SLIP 



IRVING NATIONAL BANK 

NEW YORK 



DATE RECEIVED NUMBE: 



This copy 



"orms the permanent 



CITY COLLECTION FORM ONE ORIGINAL, THREE CARBONS SEE EXPLANATION ON FORM 



main groups: The cash items and the collection items. The 
latter may be still further classified into items immediately 
payable and essentially cash items, and the time items. The 
former class includes all drafts and notes which are payable 
at sight; while the latter includes those payable at a fixed 
time, and are usually received or sent in advance of the time 



190 



THE PRACTICAL WORK OF A BANK 



of payment so that they will be ready for presentation at 
the date due. Cash items are immediately convertible into 
money, and time items are to be turned into money. 

To facilitate the handling of these items, it has been 
found best to divert them into two channels, and this is 
done in cooperation with the depositor, who is advised to list 
all checks separately and all collection items, including 
drafts, coupons, etc., likewise. A "collection" is, therefore, 



RECALL NOTICE 

Irving National Bank 



JENA/ YORK. 



191 



Please Return Without Protest 



Yours respectfully. 



Collcahn Clerk 



RECALL NOTICE FOR COLLECTION ITEM 



an item to be collected. And in order to have a clear under- 
standing of just what happens in this connection, it may be 
well to anticipate the chapter on the "Mail," and follow a 
sack of mail as it comes from the post office. As the letters 
are opened their contents are sorted, the cash items, checks, 
etc., being placed by themselves and collections by them- 
selves. 

We are concerned now with a collection only. There 
must first be a complete record of the paper, and the item 
must have care while in custody of the bank until it is final- 
ly disposed of by payment or returned to the source from 
whence it came. Its due date is the most important part. 

The clerk compares the item with the letter which ac- 
companies it, noting instructions as to whether to protest 



COLLECTIONS AND THE MESSENGER 191 

or not. The most frequent notice is that of protest or no 
protest. The instructions on collection letters differ, some 
banks directing that all items not marked "no protest" 
should be protested; others that only items over a certain 
amount must be protested, and others mark all items to be 
protested; but whatever the rule the notice should be heeded 
and passed on to the next in line unless the instructions 
are to be changed. 

The drafts which the collection clerk will receive for col- 
lection are sight drafts payable on presentation; time drafts 
payable a certain time after date or at a designated date; 
drafts with bills of lading, the latter to be surrendered upon 
paying the draft or accepting it, and drafts drawn "on ar- 
rival" of the goods. When the latter are received they are 
listed in the "arrival book" and the drawee notified. They 
are held until called for and payment made and often 
accompany large shipments moving by slow freight. Sight 
drafts are presented as soon as received ; time drafts are held 
until their due date, but are generally presented for ac- 
ceptance as soon as they are received. By accept- 
ing the time draft, the acceptor engages that he will 
pay when due. It makes it a promissory note. If the no- 
tice is sent by mail, note is made of the fact in the record, 
and if the drawee does not respond (he has twenty- four 
hours in which to accept) , it is returned. If a bill of lading 
or other papers are attached, the instructions as to dis- 
position are noted and followed. 

Let us take a note of John Smith for $500, payable 
June 1st, 1915, at the First National Bank, New York, 
received from the First National Bank of Philadelphia. 
The number on the note is 15,534. It is first verified as to 
maturity, and the maturity usually indicated in colored 
pencil. Being a home note, it is recorded in the home tick- 
ler, or city collection register, under June 1. The data re- 
corded is: Date, time to run; name of maker; where pay- 
able; when received; from whom received; the number, 
amount, protest or not; our number (indicated by number 
corresponding to line on which it is entered), fate and re- 
marks. The data may be considerably abbreviated by us- 
ing such abbreviation marks as 1/14, 1st. Phil., etc. The 
column of "fate" is left open, of course, until the item is 
paid, returned unpaid, protested or recalled. If protested 



DATE SENT 



AMOUNT DOT 



O O R 8 B R 



Original , poes with item for collection. 



NO PROTEST 

The favor of PROMPT RETURNS Is requested upon the Item herewith enclosed for^obUeo'tton. 



IF 1 UNPAID PLEASE GIVE PULL REASON 



Irving National Bank 

New York. 



DATE SENT 



D Ft A W E E 



AMOUNT DUE 



N D O R S E R 



This cop^' held in hank for xracin? ourtjos^s. 



Tracing Slip 



Irving National Bank 

New Yorlc 



E I AMOUNT I DUE Ttl 

the hanlk s permanent reclcr 



E N D O R » 



This copy 



rd of the | item. 



Penmaneint Record 



Irving National Bank 

New Yorlt. 



DATE SENT DRAWEE 


AMOUNT | DUE | QCRUEE | OOCUHOTS 


Advice for 


This copy goes to 


1 

customer |as advice, of |payme 

^,. Expense 

Net C*:i-e*rUt 


nt. 


IRVING NATIONAL BANK 






New Yorlt. 






«^* 







DATE SENT 1 


DRAWEE | AMOUNT 1 DUE 1 HCHAIIK I MCMEKTS 


Dispositioi i 






This copy formsthe credit ticket to customer 

Expense 






Irving National Bank 

New York, 





DEBIT 






DATS SENT 1 


DRAWEE | AMOUNT | DUE | eMJSM | BOCSHHTS 


D J 8 ~ C-K> J - 


1 


Thle copy constitutes the charee ticket to tl 


e collecting '■•■a-- .. 



Irving National Bank 

New Yorjt. 

COLLECTION LETTER — SIX CARBONS, ONE ORIGINAL — SEE EXPLANATION ON FORM 
192 



COLLECTIONS AND THE MESSENGER 191 

the word "Notary" is entered opposite with the date indi- 
cating that it went to the bank's notary for protest on that 
date. 

Notification 

It is customary for banks holding items for collection 
to mail notice to the maker or drawee a week or so before 
the item is due. The next step is to make out a credit and 
advice slip, which are to be used if the note is paid. Carbon 
is used and two copies made. In one large city bank all 
city items requiring presentation or payable through the 
clearing-house are written up on carbon books, whereby 
credit ticket advice of credit and file record are made in one 
operation, then they are sent out by messengers for presen- 
tation to the parties on whom they are drawn. The messen- 
gers make their returns to the note teller, who puts through 
the credits for them. Time items presented for acceptance 
are returned to the collection department, after acceptance, 
when they are treated as notes. 

The city and country notes are separated, the maturity 
dates and interest are figured on the city items and they are 
entered on a collection tickler under maturity dates, also in 
an index book under the name of the correspondent from 
whom received, so that they can be located in case the owner 
should enquire about or recall them. Then a credit ticket 
and advice (original and duplicate) are made and attached to 
each item and they are delivered to the note teller, for col- 
lection at maturity. The collection tickler is a loose leaf 
book, and each day the leaf for that day is turned over to 
the note teller, who must account at the close of the day's 
business for each item listed on it. 

When paid the credit ticket is sent to the bookkeeper 
and the duplicate to the owner. The ticket contains the 
number, name of maker, amount, when due, and where pay- 
able. Open-faced "window" envelopes are used to avoid ad- 
dressing envelopes. 

After recording the items they are held until maturity, 
and if a note-teller's department is operated, they are 
turned over to him for collection on the due date. The work 
of this department, therefore, follows. 



194 



THE PRACTICAL WORK OF A BANK 

COLLECTION DEPARTMENT TRACER. 

Guaranty Trust Company of New York 

New ¥«*.»«--____ 



Please report on the following collections 










NAME 


AMOUNT 


BENT YOU 


"" "'" 















Guaranty Trust Company of New York 

COLLECTION DEPARTMENT TRACER 



i The Note Teller 

The items that come to the note teller may be from the 
bank's correspondents, or the bank's own paper that must 
be collected, and items received from the tellers for like 
purpose. Inasmuch as the note teller handles the same class 
of items as the collection clerk he makes the same records, 
but his work involves considerable cash, since the items will 
be paid for in cash, checks, etc. The note teller, therefore, 
carries a cash balance since he is receiving pay for maturing 
notes and drafts constantly. In some banks he is also 
charged with the collection of interest on loans, the list of 



■ HmWmw-B-n 

Wqt JHarkrt attfc lulimt National Sank. 

JVew York, _ 191 


Please report BY RETURN MAIL on the following items: 




NAME 


PLACE 


SENT 


DUE 


AMOUNT 


ANSWER HERB 


















































mr IF NOT PAID. RETURN AT ONCE -m 

fours respectfully, 

JOHJV ff. CARB. Cashier. 



TRACER FOR COLLECTION ITEMS 



COLLECTIONS AND THE MESSENGER 195 

amounts due being furnished him, notices being sent out, 
and as payments are made they are taken off the list, the 
amount unpaid being known from this list. Exchange 
charges are also listed and collected by him, some customers 
preferring to pay these charges in cash rather than to have 
them deducted from the deposits. As the note teller's cash be- 
comes more than he needs, he will turn it over to the pay- 
ing teller. He receives from the discount clerk the day's 
maturities, and is accountable for all that he receives, and 
must return the items or the cash at the end of the day. 
Notes that are to be paid through the exchanges are, of 
course, put in with the exchanges of the day, and those to 
be presented by messenger sent out on the route. 

If a note is to be paid the note teller will have instruc- 
tions to honor it through the exchanges, and these items are 
sent to him, and if not instructed otherwise, they are paid 
by him and charged to the customer's account. The making 
of a note payable at a bank where the maker carries his ac- 
count is equivalent to an order on the bank to pay the same, 
and unless instructed otherwise the bank will do so. 

Notes are often presented over the counter, and the bank 
will accept the note, payable through the clearing-house, and 
so stamp it, and it becomes a cash item for the next day's 
clearings. All notes coming through the clearing-house for 
which no provision has been made as to payment are sent 
back to the bank from which they came before the expira- 
tion of the time limit. 

Notes that at the end of the day have not been paid are 
protested, by handing to the bank's notary, who makes out 
formal notice of protest and mails copies of the same to the 
indorsers. After the notary has made legal presentment 
and protest, the item is returned from whence it came, and 
the fees charged to the indorser. If it is the bank's own 
paper, it is held for adjustment among the past due items. 

The teller proves by taking the cash balance at the be- 
ginning of the day, and adding what he received and credit- 
ing himself with payments made, the balance being the 
amount called for in his cash. After the day's work is over 
except balancing, the teller will have on hand, cash, coin, 
checks on local banks, and it may be a few on out-of-town 
banks. These are charged to the different departments, and 
surplus money turned over to the paying teller. All cash 



Irving National Bank 



NEW YORK. 
CAPITAL $4,000,000 
SURPLUS $3,000,000 

New York, 



N? 2286 



We enclose the following items for Collection and Remittance. 

Yours truly, 

Telegraph Non-Payment of items ex- HARRY F WARn 

ceeding $500.00. Items under $25.00 HARRY L. WARD, 

and those marked X NO PROTEST Cashier. 



PLEASE SIGN AND RETURN IMMEDIATELY 

IRVING NATIONAL BANK 
NEW YORK. 

The within described Cash Letter \TO 2286 

has been received with enclosures as stated. 
Yours truly, 



NAME OF BANK 



Remarks : 



•.n^iyj.Trtty 



IRVING NATIONAL BANK 

NEW YORK. 



Our Cash Letter ^? 2286 



Acknowledgement Received- 
Traced 



CASH TRANSIT LETTER LOWER PART IS CARBON COPY KEPT FOR TRACING COLLECTION 

AND TRANSIT LETTERS ARE CHECKED IN TTTTS BANK BY NUMBER 

116 



COLLECTIONS AND THE MESSENGER 197 

might be so turned in, the note teller making no payments 
in cash, his cash being incoming only. If he should be 
charged with honoring notes payable at his bank, payment 
would be by cashier's checks, clearing-house due bill, or an 
acceptance payable through the clearing-house the next day. 

Out-of-Town Collections 

The term "transit item" is properly applied to those 
items received in the regular course of business which are 
immediately credited and which are treated as cash. These 
are largely, if not quite altogether, checks; while collections 
are made up principally of notes, drafts, bills of exchange 
and other items left for collection by customers, credit to be 
given only when, as and if collected. 

These items do not appear on the statement of condition, 
and are not assets of the bank, nor does any liability accrue 
until collection is made, except it be for the use of care. 

The collection department is closely associated with the 
receiving teller's department, since it is charged with the col- 
lection of all items received by him that do not (a) go direct 
to the bookkeepers; (b) items that do not go through the 
clearing-house, and (c) transit items, which are to go out as 
cash. The transit and collection departments may be one, 
or two, as the needs of the bank require; or this work may, 
as frequently obtains, be part of the bookkeeping system 
and be done in connection with the duties of other men; but 
whatever the machinery of the bank, the purpose is to ob- 
tain payment for such items as are not to be regarded as 
cash by the receiving teller, and to turn into cash the items, 
such as coupons, etc., cashed by the paying teller or received 
from correspondents. 

The out-of-town collections will consist of all instru- 
ments that are not regarded as cash, or which require more 
care and attention than a cash item is given, as, for instance, 
a block of bonds for registry, or a deed to be delivered upon 
receipt of the money, etc. Of late years it has been the cus- 
tom among merchants to draw on their debtors if the bill is 
not paid according to pre-arranged terms, and these drafts 
are sent out by large firms by the hundreds. They must be 
presented for payment, and this is part of the work of the 
collection department and the messenger. 



198 



THE PRACTICAL WORK OF A BANK 



A great many of these collection items are frequently 
no more or less than "duns," and many are returned with 
the notation "will send check." Some merchants expect 
that their firms will draw on them and make it a policy to 
honor such drafts, as a simple and easy way of making pay- 
ment, leaving it to the firm to use its judgment as to when 
to draw. Some banks refuse to handle such items unless a 
modest fee accompanies, and in this they are fully justified, 
for the process consumes time, expense and labor and is 



Amount, $ SOq.qq 



m 18892 

Maturity April 1. 1915 Interest, $. 
Rndnrxp r Sep. W* Evans Total, S- 



Maker 



Mr. B. J« Bailey, 



City 




THIS SLIP ATTACHED TO NOTE UNTIL DISPOSED OF BY RENEWAL OR PAYMENT 



largely a courtesy, the profit being inconsiderable. Drafts 
accompanying shipments of merchandise are also collected 
in this way. 

The maturity dates of country notes are figured and 
noted on each and they are listed in a register and numbered 
to correspond with the numbers on the register, then they are 
endorsed to the bank's various correspondents in the towns 
where the items are payable, and a letter written to accom- 
pany each item. The letters are written on a form, using 
a carbon sheet, which makes a copy of the letter on a card, 
and the name of the owner of the item is written or stamped 
at the top of the card. These cards are then filed according 



COLLECTIONS AND THE MESSENGER 199 

to maturity dates, and the cards under each date arranged 
alphabetically according to the place where payable. 

This system will be found very convenient for handling 
country collections. The register refers to the card by means 
of maturity date and town where payable and the card to 
the register by means of the number, so that it is always 
possible to locate an item from the owner's tracer, and one 
can always tell at a glance what items are due or past due. 
Correspondents, when writing or telegraphing about an 
item, or when remitting for paid collections, often neglect to 
give proper description of the items. It is very desirable, 
therefore, to be able to locate such items quickly on your 
records. This card record makes it possible to locate items 
readily even though imperfectly described. After the items 
are paid, or otherwise disposed of, the cards are filed in an- 
other file under the name of the owner of the note. 

Credit tickets for these items and all other out-of-town 
items are made when payment is received, on a duplicate 
form, using a carbon sheet ; the carbon copy being the advice 
of credit and the original the credit ticket; the original going 
to the bookkeeper and the duplicate to the customer. 

Let us suppose that June 2nd arrives and in the morn- 
ing mail there is advice to the effect that No. 15,534 sent to 
the First National Bank of New York has been paid. 
Turning to the cabinet the clerk finds the duplicates of 
the slips that have gone to the First National Bank of New 
York and takes out the three connected with this item. 
He compares the number and amount with the advice re- 
ceived. He marks the item paid in the tickler, sends one 
slip to the bookkeeper for credit to the depositor from 
whom received, one to the bookkeeper to charge against the 
bank crediting the item, and the advice slip to the owner 
of the paper. 

Where the bank has no regular correspondent in the 
place, it will send to the nearest town where it has connec- 
tions, and thus from bank' to bank the item will go until it 
reaches the place of payment. Frequently the bank, in order 
to save time, will despatch the item in a more direct route, 
to some bank in the place where the instrument is payable, 
preferably some other bank than the one drawn on, and by 
using the bank directories such a proper collecting agency 
will be selected. 



To 



Original, 
this copy goes with the item. 



DOCUMENTS DUE 



Endorser 



PROTEST unless otherwise instructed 



The favor of PROMPT RETURNS is requested upon the item herewith enclosed for collection. 

IRVING NATIONAL BANK 

NEW YORK. 



To 



out* oint J number 



This copy goes with th 



he signed and returned 



Endorser 



A©faa©wSedgemeiM Omlj 



IRVING NATIONAL BANK 

NEW YORK. 



To 



OATt StNT NUMUN 



Endorser 



This copy ie held in the 'bank fcr tracing. Filed under 
dates. 



Maturity Slip 



IRVING NATIONAL BANK 

NEW YORK. 



MTI •INT 



Customer 



j This is the"bank , s peraknent record. Filed| under customer. 

Permanent Record 



To be filed under Customer 



IRVING NATIONAL BANK 

NEW YORK. 



This copy goes to...the c46tomer when the item is pai 

Expense 

Net Credit 



Advice For 



IRVING NATIONAL BANK 

NEW YORK. 



This copy goes to the ho 



AMOUNT DOCUMENTS 



>kkeeper as a credit 

Expense 

Net Credit, 



Disposition 



tc the |custcmer. 



IRVING NATIONAL BANK 

NEW YORK. 



Debit 










OATZ SENT 


NUMBEPl 




AMOUNT 


DOCUMENTS | DUE 1 P„^ nr ^ r 






This dopy becomes the chj 
the item. 


.rge ticke 


i to the bank collecting 



IRVING NATIONAL BANK 

NEW YORK. 



FORM USED IX COLLECTION DEPARTMENT, IRVING NATIONAL BANK, NEW YORK. SEE 
EXPLANATION IN THE FORM. SIX CARBONS AND ONE ORIGINAL 



200 



COLLECTIONS AND THE MESSENGER 201 

Some banks have running accounts in all principal cities, 
settled periodically or daily. Thus, if a bank in New York 
has an item to collect in Cleveland, Ohio, it will send the 
item to its Cleveland correspondent for that purpose. The 
Cleveland bank will present the instrument through its mes- 
senger and either return the item unpaid or credit the 
amount to the New York bank and so advise it. If it has 
no account, it will remit by a draft less its charges for the 
service. 

Sundry Items 

There is a class of items that pass through the bank as 
cash and go to banks where no regular correspondent exists. 
To open account for each bank so used would be needless 
and consume time and space. Therefore, an account is kept 
with "sundry banks" in the general ledger, to which is 
charged items that are sent to other than regular corre- 
spondents, and returns credited, the balance representing 
the amount so outstanding. 

Coupons 

A coupon has been defined as a "little promise to pay" 
as distinguished from the parent bond, which is the "big 
promise to pay." Coupons are payable to bearer and usually 
regarded as good as money, are finely engraved, difficult at 
times to read, small, and generally difficult to handle. They 
are usually payable at the fiscal agency of the issuing com- 
pany, which is not always named in the coupon, and this 
information has to be obtained from other sources. 

Banks usually require interest coupons to be inserted in 
envelopes containing on the outside the name of the deposi- 
tor, name of issuing company, when due, where payable, 
number of coupons and the amount. If they are due they 
are generally treated as cash. If not, they are held for col- 
lection. They come through the various departments of the 
bank, receiving teller, mail, express, or from the special safe- 
keeping department of the bank, or are cut from bonds held 
as investment or collateral. If they are for collection they 
are sent through the collection department; if as cash they 
may go through the transit department, and are sent by 



202 THE PRACTICAL WORK OF A BANK 



(flN COUPONS HEM.) 



,„ n . 2SU -.., _*. 

® ^M.W . *2fau/, .fj$L su=&> 



&WHH, 3BC&X 

w^&*&-s£&t^^ — — - — — — — ■.....>-«« 

|j£i&&K2^ PHILADELPHIA. PA. 

COUPON SLIP 

f 

registered mail, insured, to the place of payment. If pay- 
able in the same place, they are, of course, presented by mes- 
senger and payment in satisfactory form returned. Being 
in the nature of cash they are handled with special care and 
receipted for as they pass from hand to hand. 

Savings Bank Books 

Savings bank accounts are frequently collected through 
other banks, and where the account is not closed out, require 
the return of the book. The book frequently goes astray 
unless special note is attached indicating what disposition is 
to be made of it when the collection is made. In sending 
such collections through a chain of banks, the book usually 

eSve?ope. NATIONAL BANK OF SOHWENKSVILIf, 

SCHWENKSVILLE, PA. 



Jo. @ $ &gr_ $..^.^"o. 

DO NOT ENCLOSE / ^ " J*> O ^3> ^> <Q 
COUPONS OF DIFFER- 
ENT COMPANIES IN " 

SAME ENVELOPE. 



Total, $ ^^o - 

Rec^d from ...~y*^rO .^.^^^s^^Jf^^^ 

Duer&ks^J,, I go i^L Payable at ll!%bX2L&**.* .. 



•^■IF C0UP0N9 ARC NO? PAID, RETURN IN THIS ENVELOPE WITH REASON. 

JtfTI-flN tYtTCM ik.li>*, 

COUPOK ENVELOPE 



COLLECTIONS AND THE MESSENGER 203 

returns through the same channel through which it came, 
and it is very apt to find a lodging place somewhere en route 
and become lost or mislaid in the files of some collecting 
bank, there to remain until hunted down — a process which 
is annoying and should be unnecessary. How much better 
it would be for the bank receiving the item in the first place, 
to attach a slip to the book, directing that the book be re- 
turned to the owner direct from the paying bank. But 
banks are so in the habit of returning items through the 
same channel as received, and the average teller being all 
too glad to get the transaction closed with as little delay as 
possible, does the simplest and easiest thing — pays the item, 
if regular, and hands the book back to the presenting bank, 
which in remitting should not only send its draft, but the 
book also. A little thought in the first instance will save 
a lot of trouble in the future. Lost savings bank books are 
not easy to replace, some banks requiring bond of indemnity, 
advertising, etc. 



£ 



1 






NMVflO WOHM NO 


tt««nlig»c<a.( 


I 

z 
in 

! 


Ul 

cs 

§. 

V 

-6. 

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C 


1 
i 

1 


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a n 
>1 

z H 


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| H • • « r. ce a| 



204 



CHAPTER IX. 

LENDING THE BANK'S MONEY 

The success of a banking undertaking depends alto- 
gether upon the loans. Bank profits come from lending 
money — and getting it back, with interest; and if the bank 
gets neither, it fails to make a profit and suffers loss. There- 
fore the department of loans requires the greatest care, for 
here credit operations will take place, and whatever profits 
and losses accrue in the course of the year will be due to the 
judgments here made. 

The function of loaning naturally follows that of de- 
posit, the two being dependent upon one another. If the 
bank had no deposits, it would have no funds but its capital 
to loan, and in that measure would prove a poor investment. 
If a bank could continue to loan by crediting its loans as 
deposits, it would make money, provided the deposits were 
not subject to call; but inasmuch as deposits, irrespective of 
whether they are the proceeds of loans and discounts or not, 
are payable on demand, when the loans are out of propor- 
tion to the cash in hand, inflation, as it is called, obtains and 
the bank is in a weakened state. But it is the loan itself and 
not the granting of the credit that we now consider, the im- 
portant subject of banking credit being reserved for an- 
other chapter. 

Loans and Discounts Distinguished 

Bank loans are made for a stated period of time, or are 
payable on demand; secured or unsecured. In the nomen- 
clature of banking, a loan is made when the interest is paid 
periodically or at the time the loan matures, as distinguished 
from a discount, where the interest is taken out at the time 
the loan is put through. Bankers generally speak of their 
"discounts" as the notes of customers they have bought or 
discounted, and their "loans" as the advances they have made 
to their customers. Their "bought paper" consists of loans 
made through brokers — commercial paper. Loans are also 
spoken of, when referring to advances made on collateral and 

205 



•206 THE PRACTICAL WORK OF A BANK 

payable on demand, as "call" or "street" loans. It is obvi- 
ous that a discount must be a loan since it is an advance of 
money; but a loan need not be a discount, although it may 
be made so by taking out the interest in advance. 

A discount may be based altogether upon the worth of 
the party offering the paper for discount, or on the joint 
worth of indorser and maker; while the loan on collateral 
would be based largely upon the value of the collateral. 
The borrower's standing may remotely affect the col- 
lateral loan, but in the last analysis the lender depends 
upon the security pledged. Loans are rarely made to the 
full value of the collateral, a margin being left for shrinkage. 

Where the business warrants there may be a loan de- 
partment charged with the duty of following all loans and 
keeping watch of the margin. This is especially true of the 
great Wall Street banks which loan millions to stock ex- 
change brokers, and whose margin must be kept good. And 
where the market is fluctuating, or is in a panicky condition, 
this department must keep careful watch on security prices 
as a matter of protection to the bank. This is called the 
"Loan Department" to distinguish it from the "Discount 
Department" which handles only the paper of customers on 
their indorsement. The loan department would properly 
handle all loans on collateral whether on stocks and bonds, 
warehouse receipts, or other forms of collateral. 

The difference between secured and unsecured loans lies 
largely in the fact that one has security definitely pledged, 
while the other has none, other than the names and credit 
standing of the parties. The latter cannot be watched with 
the same degree of care as the call loan, which can be and is 
given constant attention. 

Loans and Credit 

A loan is a present advance of cash or credit against the 
belief in its future payment. The form the loan takes will 
depend upon the maker's desires. It may be a cash advance ; 
an open book account; the indorsement of a note (a loan of 
credit) ; the giving of a note, or the acceptance of a bill of 
exchange. But when the loan is made, or the credit created, 
a new force begins to work, and this force is as effective in 
the business world as money, and is cheaper. 



LENDING THE BANK'S MONEY 207 

Banks by their natural tendency to collect unemployed 
funds become reservoirs of capital; and by the exercise of 
their lending powers become centers of credit and extin- 
guishers of trade indebtedness. Their power to cancel in- 
debtedness, by setting off debit against credit, is their great- 
est usefulness to the community at large. This power we 
see most readily in the clearing function. 

The ultimate test of the soundness of a loan is its ability 
to liquidate itself at maturity. And that is the reason why 
a mercantile loan is better than the stock exchange loan and 
so regarded in European circles. The stock exchange loan 
can only be liquidated by a sale; the mercantile loan by the 
process of consumption. For four months in 1914 there was 
no open market for securities. During August, September 
and October there was not a stock exchange open in the 
world. You could not get a quotation from any public 
source; you could not sell a bond or a share of stock any- 
where in the world except by a private bargain. You could 
not publicly offer to buy or sell. There was no "market" 
even at war prices; and all loans based upon securities were 
in a state of chaos, with no hope of prompt liquidation and 
no means of turning into cash. But a loan on wheat, or 
corn, or leather, or iron, would by the law of consumption 
soon turn itself into money; for although the world had 
stopped buying stocks and bonds, it had not ceased to eat 
and build houses. We have based our faith on the stock 
exchange loan and made it our liquid security, which it is 
not and never can be; for in critical times it fails; but the 
merchandise loan — the loan based upon an exchange of 
goods — redeems itself, war or no war, panic or no panic. 

Deposits are Often Loans 

The manner in which a bank builds up its deposits by 
making loans may easily be seen from the following illus- 
tration: Let us suppose a bank has capital of $100,000 
and no deposits. It begins business by making a loan to a 
certain individual of $10,000. He does not desire the cash, 
and prefers to have credit on the books of the bank for the 
amount, with the privilege of checking out the amount as he 
needs the money to pay his bills. The bank now has de- 
posits of $10,000. Another borrows $10,000 and deposits 



208 THE PRACTICAL WORK OF A BANK 

the proceeds of the loan and the deposits become $20,000. 
The bank might loan its whole capital this way, but for a 
provision in the law, national as well as State, varying only 
in the amount required and not in the principle involved, 
and known as the reserve requirement. By this a bank is 
required to set aside in cash or keep on deposit with ap- 
proved reserve agents a portion of its deposits, running 
from five to eighteen per cent., depending upon the nature 
of the obligation created, whether time or demand, the place 
and the character of the bank. 1 The danger in banking may 
be seen from the extension of this loaning process. 

Let us suppose that a bank has a capital in cash of 
$100,000 and no deposits. It must set aside by law ten per 
cent, of its deposits as reserve. It begins to make loans. It 
loans A $20,000 (which he deposits) and it sets aside $2,000 
as reserve, crediting hirn with the loan. Let us assume it 
puts the $2,000 in a vault by itself. It loans B $20,000, set- 
ting aside $2,000 more, and credits B with $20,000. It 
loans C and D $20,000 each likewise, setting aside $4,000, 
and credits the amount. There is now in its reserve $8,000, 
and $92,000 of its capital still in cash, and it can loan all but 
its reserve to E. This it loans to E in cash. The transac- 
tion tabulated will look like this : 

Capital 
$100,000 



Cash to loan 


Loans 


Reserve 


Deposited 


$100,000 










(A)$20,000 


$2,000 


$20,000 


98,000 


(B) 20,000 


2,000 


20,000 


96,000 


(C) 20.000 


2,000 


20,000 


94,000 


(D) 20,000 


2,000 


20,000 


92,000 


(E) 92,000 




(Cash paid) 



$172,000 $8,000 $80,000 

The balance sheet will then be : 

ASSETS LIABILITIES 

Loans and discounts $172,000 Capital $100,000 

Cash 8.000 Deposits 80,000 



$180,000 $180,000 

If only A and B ask for their money it will have but 
$8,000 to pay $40,000 of debts created by crediting its loans 
as deposits, and cannot meet its engagements. 

iSee under "Reserves" for the reserve requirements of banks in the Federal 
System. 



LENDING THE BANK'S MONEY 

By experience it has been found that a reserve of about 
twenty-five per cent, is ample in the large cities to carry the 
banks in normal times, and the National Banking Act so re- 
quired; but the Federal Reserve Act makes the proportion 
eighteen per cent, which, by virtue of the rediscount machin- 
ery, is considered ample; but the principle is the same — a 
cash fund from which to meet the daily demands of the de- 
positors. In Europe there is no obligatory reserve, this be- 
ing left to the judgment of the bankers; but how much re- 
serve to carry and do full justice to the bank (the reserve is 
a source of loss) and still be within the limits of safety is 
the art of banking. 

It is when the deposits are fictitiously increased by mak- 
ing too free credits, extending credit unwisely, and allowing 
the reserve to decrease until it becomes out of all proportion 
to the debts that danger accrues. We then have inflation. 
It has been ascertained that the danger point under past 
conditions was about twenty-one per cent. ; that is, when the 
reserve stood at about twenty-one per cent, for the country 
as a whole it was too low and loans should then be restricted, 
so that deposits would decrease until the margin was greater. 
What the Federal Reserve Banks will do in alleviating all 
such reserve evils remains to be seen. 

Liquid Loans 

The secret of sound banking is to have a steady stream 
of money coming in by way of maturing loans, so that the 
constant stream of obligations falling due daily by reason 
of the demands of the checking depositors, may be met. A 
demand obligation cannot be met by a time security, and 
only as the bank keeps its funds liquid — that is, flowing in 
and out — can it meet every demand made on it without 
hardship. 

Banks all over the country when in funds send them to 
New York to their correspondents, for lending in the market, 
or on joint account. The New York bank may lend for the 
country bank's account in the market, or lend for its own 
account, and pay interest: but whatever the method, the 
money finds its way into collateral loans secured by stocks 
and bonds, and when money is plentiful and cheap we have 
an era of speculation; and if for any reason the loans must 



210 



THE PRACTICAL WORK OF A BANK 



be called, it leads to a sudden contraction of credit and the 
whole country suffers. The fact that the loan can be called 
at any time, and in the event of failing to realize upon it, the 
bank may sell the security, is in a sense a menace to the 
peace of mind of the debtors. 

A large number of banks make loans for correspondents, 
using the same care as with their own loans. Where one 
bank acts as an agent for another in loaning funds it is only 



PAPER DISCOUNTED AND OFFERED FOR DISCOUNT 

Weei ending 191 

PAID $ _^ M. DISCOUNTED $ :M. 



OFFERING SHEET AND RECORD OF PAPER DISCOUNTED 

required to use the ordinary care which is customary in the 
transaction of business of that nature; that is, the bank is 
not a guarantor. 

Applying for a Loan 



As soon as a request for a loan or a discount is made, 
the credit machinery begins to work. The credit department 
will be charged with obtaining the information needed to 
pass upon the loan. It may be in the files, or it may have 
to be obtained. If the offering is made formally, it will be 
on an "offering slip." It may be in an offering book. If it 
is commercial paper offered through a broker, it will likely 
be on a list of offerings prepared by him, and submitted 
either by mail or by representative. 

The offerings go before the proper officials, either the 



LENDING THE BANK'S MONEY 211 

officers or the discount committee. Usually an officer is des- 
ignated to pass on the offerings, and the committee sanctions 
his judgment either by attesting the offering book or with 
some mark on the discount register to indicate their approval 
of the loan. Loans are sometimes submitted in a written 
report to the board and ratified by making the offerings 
and acceptances part of the board records. 

! 

Collateral Loans 

If the maker of the note wishes to reinforce his credit, 
he will offer the bank collateral, i. e., he will lodge with it 
certain stocks and bonds or other securities to support the 
loan, and these the bank may sell in the event of the maker 
f ailing to pay his note as agreed at the appointed time. We, 
therefore, have the collateral loan. And in the latter case, it 
is not the borrower's credit that is the pivotal point, but the 
quality of the collateral. 

The collateral loan is made for two purposes: First, to 
allow the broker (most collateral loans are to brokers and 
dealers in securities) to buy and sell with the funds of the 
bank, using but little of his own capital. In fact, a broker 
with good banking connections can buy and sell with almost 
no capital at all. And secondly, to permit security holders 
to use the capital invested therein for a time (or perma- 
nently) . without selling the security. It is profitable to 
borrow on a bond that pays five per cent, at two or three 
per cent, even with the margin. Thus the bond pays, say 
$50 interest yearly. The owner pledges it with a bank for a 
$900 loan and pays four per cent., or $36 a year, and he is 
$14 ahead on the transaction. He has had the use of part 
of the money and at the same time has drawn interest on 
all. Only when he must pay more than five per cent, will 
it be more profitable to sell, even at cost, than to borrow. 
And with a rate of two per cent, possible in New York dur- 
ing ordinary times, to pledge a bond or stock that nets five 
per cent, and only pay two per cent, is distinctly profitable. 
By our system of centering money in New York we have 
specialized in Wall Street loans and made them the liquid 
asset of the country. 



212 



THE PRACTICAL WORK OF A BANK 



B 



DEMAND 



Date. 



Amount 



Rate 


































(Original 


Present 


COLLATERALS 


Price 


Value 















Street Demand 



Date. 



























Amount 


Rate 




























Original 


Present 


COLLATERALS 


Price 


Value 































LOAN RECORD CABM 



LENDING THE BANK'S MONEY 218 

Listed and Unlisted Securities 

In making a collateral loan several elements enter, the 
important ones being: The collateral, what is it? What is it 
worth? Is it "straight" or "mixed"; listed or unlisted; high 
grade or low grade, or doubtful? Has it a ready market, 
and broad? A bank president when urged to equip his new 
building with a vault of the heaviest armor plate, replied: 
"It is not armor plate that is wanted, but a vault that will 
keep out bad collateral." 

Securities pledged as collateral are of two main classes: 
listed and unlisted. The former includes all securities dealt 
in on the exchanges whose value may be ascertained from 
the published figures of stock market quotations. Unlisted 
securities are those that are dealt in on the "Curb," and, 
therefore, quoted in the curb quotations, and those other 
securities issued by companies and corporations everywhere, 
some good, very good, some half good and some all bad. 
Some can be sold in a few hours, or in a few minutes, and 
some couldn't be given away. This is not to say that unlist- 
ed stocks are all bad or any of them bad, for such high-grade 
stocks as Standard Oil are unlisted and are of the very best; 
but the reference is to mining stocks, oil stocks, and others 
of like character whose value is undeterminable by any 
process known to the banking fraternity. Municipal bonds 
are generally unlisted, except a few issues such as New York 
City, State of New York, Government bonds, and the like. 
But a mixture of quickly salable bonds and high-grade 
stocks makes the most desirable collateral. 

The unlisted bonds and stocks often pay interest and 
dividends regularly and are of intrinsic value, but not being 
listed on any of the exchanges, command a limited market, 
so that in times of stress they are likely to join that class 
known as "indigestible." To handle this kind of collateral 
calls for keen judgment, for otherwise the necessity may 
arise at any time of carrying such securities for a long 
period pending an opportunity to unload. 

Then again there are certain good listed stocks of in- 
trinsic value, but with only a moderately active market, the 
selling price of which may be materially affected if any 
large quantity is offered for sale. The question of mar- 
gin enters quite largely into consideration on taking loans 



No. 



SLOW TIME 



Dat 


B 














Amount 


Rate 


































Ortfioal 


Present 


COLLATERALS 


Price 


Value 















Slow Time 



discounted 



Name. 



Address 



Line 



Required Balances 



% 



TOTAL LOANS 



Loan Dated 


Rate 


Due 


Amount 


Remarks 




































































































Original 


COLLATERALS 


Present 










Receivables Aggregating 


























































































Margin Required % 





































COLLATERAL LOAN RECORD CARDS 



214 



LENDING THE BANK'S MONEY 215 

on collateral of this class, and it should be the policy of one 
finding it necessary to liquidate such loans to put out the 
securities in small blocks. 

The Margin 

It is impossible to express a hard and fast rule governing 
securities pledged for loans, for the reason that the nature 
of the loan is dependent upon the contract between the bor- 
rower and the lender. As a general rule twenty per cent, 
margin is required to be kept good. In some cases even 
greater margins are required. Where high-grade bonds 
form the security a much smaller margin is exacted. Dur- 
ing the panic days of 1907, forty per cent, margin was in 
certain cases demanded by the banks on loans. Some lend- 
ers insist on all dividend-paying railroads, others are willing 
to lend on various mixtures of railroads and industrials, and 
this is the general rule. The ordinary Wall Street loan is 
secured by about sixty per cent, railroads and forty per cent, 
industrials, sometimes half and half, sometimes seventy and 
thirty per cent, respectively, and sometimes all industrials. 
Generally in the case of a preponderance of industrials a 
slight advance over the current rate of interest is asked. 

The reason why mixed collateral is preferred is the fact 
that in case the loan has to be called and the security sold, 
there will not be forced on the market a large quantity of 
one stock, thus depressing the price. 

The higher the quality of the stock the less margin may 
be carried with safety. Thus, on a New York City bond, a 
loan may be made up to nearly the full face value, while in 
a more speculative stock, a larger margin is necessary. 
High-grade railroad bonds are of more stable nature than 
railroad stocks, and the margin in one case would be less 
than in the other. In times of stringency and market activ- 
ity values fluctuate widely in most stocks, particularly the 
active stocks, and a wider margin is required if safety is to 
be assured than if a high-class bond were pledged. 

In Kirkbride and Sterret's Modern Trust Company it 
is said: "In New York two tests are applied to a collateral 
loan, the first requiring that the value of the securities must 
have a margin equal to twenty per cent, above the amount 
of the loan, and the second that the loan must have ten 



Form 



LOAN AT 





TO 






















DATE MADE 


DATE DUE 


£ 


@ 


$ 


































J 


■ 












remarks: 

















SECURITIES 



ENVELOPE FOR LOAN COLLATERALS 



216 



LENDING THE BANK'S MONEY 217 

points margin. That is, the amount loaned must be $10 
per share less than the market value of the stock. This is 
reckoned by dividing the number of shares of stock (or if 
bonds $10,000 are equivalent to one hundred shares of 
stock) into the margin. 

"For example, if there were 2,000 shares of mixed stock 
in a loan of $100,000, divide this number of shares into $20,- 
000 (the twenty per cent, margin) and the result shows the 
average margin of ten points on each share held. 

"If the ten-point rule is strictly adhered to it has the 



Q&P^i ^~ SHREYEPORT. LA. /H^^ "^ 191^. 



.days afterdate we, the stolen, endorsers, sureties, and all of ox, to sofldo. promise to pay to the order of 



THE CONTINENTAL BANTC& TRUST COMPANY, at ttefr banktaa house in Shreveport, Louisiana, the sum of 



Sr vatae received, with Interest thereon, at the rate of eight per cent per annum from maturity until paid. >^^V^JL~Jif5^V 

This note Is secured by pledce and delivery of- the securities mentioned on the reverse hereo^WbWptf^ild»e«hinJ?9NDBCLINB IN VALUE, the- 
matter of thi3 note hereby agrees, within twenty-four hours from demand on him to that effect m <W-A^yjfa MK^W ,^\5VrTTi tc ' t0 (urnl,il and Pledge 
ADDITIONAL. SECURITIES, satisfactory to the holder of this note, to cover euch decline. Ana^fJ^/IaSuftg* fffl"*! °r^*Hf maker to furnish sueh 
additional securities when so called for, shall AT ONCB MATURE this, note and pledge. ffi^f VC MtmmB& \"°\\ 

Should this note not BE PAID AT MATURITY, or when It BECOMES DUE 'by failure to/ijpdish TtddTllonaT securitliSJ&I above provided, or for 
any other, reason, the then holder thereof Is hereby authorized TO SELL the pledged securities, w/Wy D, jFnA* Ps|vate| ftJpQYlpJ|Ut re;.our«e to Judicial 
Proceedings, and Is hereby Irrevocably authorized to transfer any shares of stock, or other e»ciirltftfe4d t^fb&ks |f th|5Jb|aJ*iy ffsulns Same to purchaser 
tinder such Public or Private sale. The proceeds of the skid pledged securities Bhall be applied (l«lo fee payment .nf^ali coetaPanflJ commissions for selling; 
(2> to the payment of this note In principal and Interest and the ten per cent, attorney's fees, bel» sBpulateBtSsiftSs) to die J»ymem of any other In- 
debtedness, then due or thereafter to become due. by the maker of this note^to the said CONTInIJntXl B*fc6H fcWWrST/^OMPANY up to the sum of 
$1011,000. The holder of this note shall have the right to purchase the pleded securities at thelrVrfearlWt iMwriTThe.-e Vl ajif market value, or at any 
judicial or auction sale thereof. Should this note not be paid at maturity or when due as above.^w. shnyjd It becomes>Tiece«ary to employ an attorney 
to make or enforce the same, or should this note bo placed Jn the hands of an attorney for co!lectio^^JJj^««Jsex_^l>*utMfc/the fees for such attorney, 
whloh are fixed at 10 per cent, on the amount then due on this note, which attorney's fees are secur^gSSWpILj-jjKzK^JSsjF'the maturity of this note, or 
when otherwise due, as above provided, any money on deposit or otherwise to the credit of ihe maker^fe^ said CONTINENTAL BANK & 
TRUST COMPANY, shall at once stand applied to the payment of this note, unless it be otherwise paid. I'LU an swers and endorsers severally waive pre- 
sentation for payment, protest and notice of protest, and non-payment of this note. 

DUE ^1/ : 



DOLLARS 



^Q&su£ff 



COLLATERAL TIME NOTE 



effect of discriminating against low-priced, non-dividend- 
paying stocks, while the twenty per cent, clause requires an 
ample margin on high-priced stocks. There are a few in- 
stitutions in New York that require nearly fifteen points 
with the twenty per cent, margin, and some which do not 
adhere strictly to the ten per cent, requirement." 

The usual margin required is from twenty to twenty-five 
per cent. ; that is, on a hundred dollars' worth of stock from 
seventy-five to eighty dollars would be loaned. 

"Watching the Ticker" 

In a large and active bank making a specialty of collat- 
eral loans, there is careful watch kept over all securities on 
which the bank loans. In a room with a stock ticker and 
other news agency reports there is a clerk who has a record 



218 THE PRACTICAL WORK OF A BANK 

$ New York, „^„„ .191 ^ 

..., _ - ■--- ...» after date, without grace, the undersigned, for 

value received, promise to pay to the Guaranty TrUSt Company Of NeW York, or order, 
at the office of said Trust Company in the City of New York, in funds current at the New York Clearing House, 

_ - - • ••• ■• ...» ~ Dollars, 

■with interest at the rate of — per cent per annum, payable quarterly on the first days of 

January, April, July and October, having deposited with said Trust Company as collateral security for the payment 
of this or any other liability or liabilities of the undersigned to the Trust Company, due or to become due, or 
which may hereafter be contracted or existing, including as well promissory notes, bills of exchange, and other 
evidences of indebtedness made, endorsed or accepted by the undersigned and purchased or owned by the Trust 
Company, the following property, viz.; 



The undersigned hereby agree to deposit with the Trust Company such additional collateral security 

as the Trust Company may from time to time demand , and also hereby give to the Trust Company a lien for 

the amount of all the liabilities aforesaid upon all the property of the undersigned at any time coming into the 
possession of the Trust Company, and also upon any balance of the deposit account of the undersigned with the 
Trust Company. 

On the non-performance of the foregoing agreements as to furnishing additional collateral, or upon the 
non-payment of any of the above-mentioned liabilities, then and in either such case the Trust Company is hereby 
authorized to sell, assign and deliver, the said property, or any substitutes therefor, or any additions thereto, or any 
such other property, at such time or times and in such several parts or parcels as the Trust Company or either of its 
officers may decide, and to sell the whole or any of said parts or parcels, either at any broker's board, or at pubKc or 
private sale, either for cash, upon, credit or for future delivery, at the option of the Trust Company, or of any of its 
officers, without advertisement, or notice, which are hereby expressly waived. Upon the non-payment or the non- 
fulfillment of any of the conditions of this note, then the whole or any designated part of the liabilities of the 
undersigned to the Trust Company shall mature at the election of the Trust Company by presentation thereof for 
payment. In case of any sale by the Trust Company, of any of said property on credit or for future delivery, the 
property sold shall be retained by the Trust Company until the selling price is paid by the purchaser, but the Trust 
Company shall incur no liability in case of failure of the purchaser to *ike up and pay for the property so sold. In 
case of any such failure the property may be again sold. At any sale hereunder the Trust Company may itself 
purchase the whole or any part of the property sold, free from all right of redemption on the part of the under- 
signed, . which is hereby waived and released. In the case of any sale the Trust Company may first deduct all the 
expenses for collection, sale, and delivery of the property so sold, and any other expenses incurred by the Trust 
Company in connection with such sale; and may then apply the residue to any one, or more, or all, of the said 
liabilities, whether due or not due, returning the overplus, if any, to the undersigned, who shall remain liable to the 
Trust Company for any deficiency arising upon, any such sale. The undersigned do hereby further authorize 
the Trust Company at its option at any time, to appropriate and apply to the payment of any of said liabilities, 
whether now existing or hereafter contracted, any and all moneys or other property now or hereafter in the hands of 
the Trust Company on deposit or otherwise, to the credit of or belonging to the undersigned, whether the said liabilities 
are then due or not due. The undersigned further agree that, upon any transfer of this note, the Trust Company 
may deliver the property held as security, or any part thereof, to the transferee, who shall thereupon become vested 
with all the powers and rights above given to the Trust Company in respect thereto, and the Trust Company 
shall thereafter be forever relieved and fully discharged from any liability or responsibility in the matter. 

COLLATERAL NOTE 

of all collateral loaned upon and the price at which the loan 
was made and the name of the borrower. As changes occur 
in the market, notation is made and when the margin gets 
too close additional security is called for. 

The Borrower 

The second element to consider is the standing of the 
borrower. If the borrower is doubtful, the bank may have 



LENDING THE BANK'S MONEY 219 

to sell its collateral, and this it does not desire to do. It 
makes a loan hoping to receive the funds back. It does not 
want the proceeds of collateral. It dislikes to go on the auc- 
tion block. If not reliable, the borrower may skirmish for 
time, and find some technicality to prevent a sale. It may 
mean trouble, and trouble the bank does not want. 

Title to the Collateral — "Good Delivery" 

It is important that title to the collateral be vested in the 
borrower and that it be conveyed in proper form to the 
bank, so that it becomes "good delivery" — that is, will be 
transferred upon the books of the issuing corporation or its 
fiscal agent. The rules of the New York Stock Exchange 
are said to be the most strict of any in the country and if 
transfer is in accordance therewith, it will probably pass 
anywhere. If title is defective the bank will have trouble in 
collecting its money. If it holds bogus stocks and bonds it 
has no collateral at all. What is good delivery depends 
upon the usages of the trade and the rules and regulations of 
the stock exchange in listed securities, and in the case of un- 
listed securities, the rules and regulations of the issuing 
company. 

Certificates of stock received as security should be dated, 
signed, sealed and duly attested by the registrar. Powers of 
attorney upon the back of certificates should be carefully 
filled in, leaving the name of attorney and of the party to 
whom the transfer shall be made in blank. 

The signature to the power must correspond with the 
name upon the face of the certificate and should be wit- 
nessed. Bonds offered as collateral should be closely 
scanned to note if registered. If so, power of attorney must 
accompany. Signature, date, seal and next maturing 
coupon must all be in place. 

Form of Collateral Note 

To those who are in the habit of handling stocks and 
bonds, it may seem superfluous to consider for a moment 
any questions pertaining to the form of note or power of 
attorney used in connection with collateral loans; but we 



220 THE PRACTICAL WORK OF A BANK 

shall take it for granted that there are some to whom a few 
suggestions will not go amiss. 

The form of note should provide for a call of margin, 
with the privilege to sell the collateral in event of the failure 
of the borrower to maintain the margin; it is also advisable 
to have a clause in the obligation to cover any direct or 
contingent liability. 

Care should be taken in the execution of the power of at- 
torney in order that certificates of stock may be a good de- 
livery; the name of a bank or any of its officers should not 
be included in the assignment, either as transferee or at- 
torney. The signature to assignments must be technically 
correct; i. e., it must correspond with the name as written 
upon the face of the certificate or bond in every particular, 
without alteration or enlargement or any change whatever. 

Certificates in the name of a married woman should not 
be taken unless the husband joins in the execution of the 
assignment and a joint acknowledgment be taken before a 
notary public. 

Several or more powers of attorney should be required 
when a large block of stock is pledged, as considerable diffi- 
culty may arise in selling the collateral if the whole block 
must be sold. 

It should be the habit of the one intrusted with the hand- 
ling of collaterals to daily follow quotations closely, and yet 
there are many instances where sales are "washed" to bolster 
values and consequently create fictitious quotations ; general- 
ly, however, the public expression, as represented by sales on 
the stock exchange, is a good barometer of actual values. 

To those who desire to become competent to look after 
the collaterals I would advise, in the first place, careful read- 
ing of the best newspapers and journals, whose equipment is 
especially adapted to wants of investors, and secondly, actual 
contact in the practical work of the department wherein you 
get accustomed to handling the various stock certificates, 
bonds, etc. 2 

Time Loans 

Aside from the demand note, there are two main forms 
of notes used in banking, the first of which promises to pay 

2Louis N. Spielberger in The Bankers Magazine. 



LENDING THE BANK'S MONEY 221 

a certain sum a specified number of days or months after 
date. The other promises to pay the amount on a certain 
date. In the first case the maturity must be figured, and 
due allowance made for the different rules regarding Satur- 
days, Sundays and holidays in the different States, as well 
as days of grace, now fast becoming a thing of the past, as 
they should be. Notes are usually made payable at some 
bank and must be presented there. Bankers' guides are pub- 
lished giving the laws of the States regarding grace, pro- 
test, holidays, etc., for use in timing notes. These, of course* 
are part, and a necessary part, of every bank's outfit. 

The Bookkeeping of the Loan 

As soon as the loan or the discount is accepted the loan 
records begin to take shape. The note must be made out 
and signed. If it is already in signed form, as in the case of 
a discount, it must be properly indorsed. If it is a collateral 
note with finely printed terms, the bank will insist that the 
note be on its own form. If securities are to be delivered, 
they must be brought in and examined. 

Having the note in hand we must determine: when it 
matures; the value at maturity, including interest, if inter- 
est is to run; the time in days until day of payment, for in- 
terest calculations; the interest or the discount, and the pro- 
ceeds. Having determined the proceeds the amount is cred- 
ited to the customer, the interest to interest account, and the 
face amount charged to loans and discounts. Tickets for 
the various entries are sent to the several departments; or 
in the case of a small bank put through the journal records. 
We have thus kept the equilibrium heretofore mentioned, 
for, supposing the note to be for $100, six months to run, at 
six per cent., we would credit the depositor $97, interest $3, 
and charge discounts $100, maintaining the balance. 

In timing the item, the due date is placed upon it in 
some conspicuous place, generally provided for in notes. If 
interest is to be added this is figured and noted usually over 
or under the figures in red ink. 

If cash is paid for the loan, cashier's check is drawn, 
New York draft issued, or the cash itself may be paid. But 
the more frequent way in the case of home loans would be 
to pass the same to the credit of the borrower. But in buy- 



222 



THE PRACTICAL WORK OF A BANK 

DISCOUNT 



DATE OF -NOTE 


— L 

Our 
Number 


Their 
Number 


DRAWER OR MAKER 


DRAWEE OR ENDORSER 


WHERE PAYABLE. 






ni 














.02 














03 














. 04 










■ 




05., 











DISCOUNT 



ing commercial paper, draft is, of course, sent to the broker 
in payment of the paper purchased. 

It is important that the laws of the various States as to 
holidays be known in timing notes, for while days of grace 
are generally abolished, holidays differ and the laws relative 
to presentment of paper are not uniform. In some, the 
paper is due the day before a holiday and in others the day 
after. Paper due on Sunday is, as a rule, payable on Mon- 
day. The uniform Negotiable Instruments Act will be a 
safe guide in this respect. 

The next step is to enter the item on the discount register 
— the "history book" of the discount department — recording 
as one banker puts it "the birth of every loan and its death." 

The loan register contains full details as to maker, in- 
dorser, date, time, where due, maturity, amount, rate of 
interest, interest or discount, exchange, and other details that 
are necessary to completely describe the paper. 

This discount register is a book of original entry and 
constitutes one of the most important records of the bank. 

Maturity Record 

Record is also kept of the maturity of the loans by a 
maturity register, which classifies the notes according to due 
dates. After entry on the discount register, it is entered on 
the maturity book, first that it may have attention when due, 
and also to ascertain how much is maturing each day for 
reinvestment purposes. By referring to this book, the loan 
or discount department may tell at a glance what notes are 
coming due, and how much will be in hand for reinvestment. 
From this record notes pre turned over to the collection de- 
partment for collection, if not presented by the loan or dis- 
count department through messengers. The maturity book 



LENDING THE BANK'S MONEY 
REGISTER 



223 





































TIME . 


Wheo 
Discounted 


WEEN DOE 


AMOUNT 


Amount 

Discount 


AMOUNT PaId 


WHEN PAID 


EEMARK& 



































































































































































REGISTER 



is a most important record, for it checks the notes falling 
due, and keeps the payments up to date. Presentment is a 
most, if not the most, important detail in the discount de- 
partment, and failure to present a note may lead to losses. 
Simpler things than this have brought litigation, and some 
debtors are only too glad for an opportunity to escape 
liability. 

When the loan is properly recorded, and classified as to 
due date, it is filed in a document case, constructed espe- 
cially for this purpose, and divided into days and months. 
Special trucks are sometimes provided for these maturity 
records, the truck being wheeled into the vault at night. The 
notes therein contained are exceedingly valuable, for if lost 
or destroyed endless confusion would result. 

It is suggested that the bank's own paper — paper of its 
own customers running to it — be kept in another ink to dis- 
tinguish from the paper of customers discounted for them. 

The Borrower's Liability 

Thus far we have discounted the note, sent the credits 
and the debits to the proper departments, or made the prop- 
er entries, informed ourselves when to look for payment, 
and there remains to discover how much the discounter or 
borrower owes on similar obligations. This is recorded on 
liability cards or ledgers, the record including what the party 
owes directly and contingently to the bank, and is a useful 
and necessary part of the bank's information in making 
loans. 

It becomes exceedingly important that the bank follow 
the law in the matter of loans, in that it shall not lend to 
any one party or interest more than a certain percentage of 
its capital, or capital and surplus. The law is strict in this 

15 



224 



THE PRACTICAL WORK OF A BANK 



LOAN DEPARTMENT-PROOF SHEET 
For 12L- 



Debit Clerk 
Credit Clerk 

Collection Department 
Coupon Department / 
Paying Teller 

Receiving Teller 
Trust Department 
Reorganization Department 
Securities Department 
Foreign Department 



Total Departmental Balances 

Demand Loans 

Time 

Bills Purchased 

Customers' Loans 

Accrued Interest Receivable 

Expenses 

Interest Due Customers 

Customers' Collateral 

Commissions 

Treasurer's Checks 

Fifth Avenue Branch 



Loan Balances : 
Demand 
Time 



PROOF SHEET — LOAN DEPARTMENT 



and must be obeyed, for many banks have come to grief 
through overloaning to one party, and it is both good bank- 
ing and good business to scatter the risks, and not put too 
many eggs in one basket. 

The discount register will show how much the bank has 



LENDING THE BANK'S MONEY 



225 



LOCATION 



PRESENT BATE 



NAME 














ACCOUNT OPENED 


























AV. BAL. 


LOAN (irr or MOHT..) 


AV. BAL. 


lO.»!,.,o-«.T.) 


AV. BAL. 


LOAN <WOf MOWTB> 1 


JANUARY 




























flBRUAHY 




























MARCH 




























Aran. 




























May 


























4 


JUNC 




























JULY 




























AUGUST 




























9CPTCMBE* 




























OCTOBER 




























NOVEMBER 


























J 












| 


| 














< 



AVERAGE BALANCE AND AVERAGE LOAN CARD , 

loaned, but it does not show how much to A, B and C, and 
we must, therefore, segregate these items so that the liability 
of each borrower, direct and contingent, shall be known. 
This is important, not only that the law may be obeyed, but 



UNION BANK ft TRUST CO.. Jacimon. Tenn. 







OATK 


NO, 


OTXIA NAHU 


WHIN 

out 


NO 


• • 


CN DOUSED 


AM MAKCK 






"">""' 




CO.T. 


BAfAJWl 


»"""* 


C.AOTf 


•***«« 
















































































































































































































































































































































■ 1 


















































_ 












































































I 



LIABILITY LEDGER 



also that the bank may be within the limits of safety; and 
unless it can follow the changing liability of the borrower 
from day to day will be all at sea as to its risks. This lia- 
bility is of three classes: (a) Direct; (b) as indorser, and 
(c) as discounter. With a system of recording this Liability 



Account No, 



**. 


ENDORSER FOR 


Jit 


Feb. 


kLv. 


|fr. 


H*j 


ta, 


Ml 


it, 


Stpt 


Oct 


fcr 


Dec 


TUB 


*H PmeiiBj 


Sndorwr 


BBUEXB 












































































































































































































































































































































































































. u. 




















































--.. 



LIABILITY BOOK 



226 



LENDING THE BANK'S MONEY 



227 



" 




































RENEWAL OF 
Nn 


The Federal Title & Trust fo Number 


143?fi 




OF BEAVER FALLS. PA 

DIRECT LIABILITY Out 

Maker 








Dale Purchased 




-# 


First Purchased Number Amount, J 




Renewed bv Number Purchased from _ 




Where Pavable Address 






1 


DATE. OF PAPER 


TIME 


RATE 


FACE 


INTEREST NET AMOUNT 








* 












ENDORSERS 


- II 1 1 


















RECORD OF * DEMAND LOAN PAYMENTS AND BALANCE 




COLLATERAL 


■OKTH 


H 


TIAlj] INTEREST AMOUNT (J BALANCt 


h-^Bh 


















^™"^^HI 
























































































r~ 










RtMARKB 






DATE FINAL PAYMENT WCM|n 










- 





Liability Sheet 

The above liability sheet is used in a manifold system with different colored 
sheets, the record being made by one operation. The original is the direct liability, 
the first copy the maturity sheet, the third the discount register, and the last 
the contingent liability. As soon as a note is recorded the sheets are filed in 
their respective binders. The liability ledger is indexed alphabetically, sub- 
divided further if desired. The direct as well as the contingent liability sheet 
is filed under proper division. The sheets constituting the discount register are 
listed on the recapitulation sheet and the total charged in the day's business on 
the journal. 

The sheets for the different bills purchased, together with recapitulation, 
are filed in the discount ledger until removed. The maturity sheets are filed 
according to due date, and a statement taken at any time from the maturity 
tickler will indicate the aggregate of the loans. 

At the beginning of the day's business the sheets are taken from the maturity 
tickler, then from the liability ledger, both direct and contingent sheets being 
removed, and all attached to the note falling due. As soon as the item is paid 
or renewed the sheets are pinned together and filed on a check file, and at the 
close of the day's business are listed on the recapitulation sheet and the totals 
carried to the journal. The sheets are then filed in their transfer binders. 



the bank can tell at a glance how much its borrowers are 
indebted to it. 

A liability book is, therefore, kept, showing how much 
each borrower is indebted to the bank, directly and indirect- 
ly, and the bank can ascertain at any time just how much 
risk it is carrying with one person, firm or corporation. The 
risks might still be further divided in classes of dealers, it 
being good banking to have many rather than a few baskets 
in which to carry the eggs. A good bank would not and 



THE PRACTICAL WORK OF A BANK 



Guaranty Trust Company of New York 


Fifth Avenue Branch 140 Broadway London Office 
Fifth Avenue and 43rd. Street 33 Lombard Street, E. C. 




New York - 191 








Dear Sirs: 


— 


We beg to advise the following substitutions, which were made to-day in your 


loans, as listed below: 

Yours very truly, 


Guaranty Trust Company of New York 


W. C. EDWARDS, Treewer 




NAME 


WITHDRAWN 


RECEIVED 




. 





NOTICE OF SUBSTITUTIONS IN COLLATERAL LOAN 



should not loan all its funds to a single line, such as milli- 
nery, dry goods, leather, manufacturers, etc., for many a 
bank has gone down by not heeding the truth of the maxim 
above quoted. 

Some banks, in order to keep track of their collateral 
loans, have an index arrangement showing how much they 
have loaned on each class of stocks or bonds, and to whom 
the loan is made. This is to prevent a bank from becoming 
overloaned on one particular stock. But a good loan clerk 
will at least keep a mental memorandum of the prevalence 
of a certain stock and guide his actions accordingly. 

In collateral loans the note, properly executed, should be 
placed in a heavy manilla envelope. On the envelope is re- 
corded the number of the loan, borrower's name, date, 
amount, rate per cent., a full description of the securities 
and the value. The value should be kept in lead pencil, so it 
can be readily changed. All envelopes are filed alphabet! - 
callv. A record of the loan is also made in a loan book, 



LENDING THE BANKS MONEY 229 

which is an account of each day's loans. This book goes to 
the board of directors for their examination. A record is 
also made on a card, which is practically a duplicate of the 
envelope, except there are spaces for the change in interest 
rates, and for part payments. This information may be 
kept on the envelope if desired. 



Substitutions 

In collateral loans substitutions are allowed from time 
to time, as the stocks are sold and others bought. When a 
broker sells stocks he must deliver them, and if he has them 
on loan he withdraws them from the loan and substitutes 
others. The loan clerk is familiar with the terms of the loan, 
knows what stocks to accept and what to reject to keep the 
margin good, and follows the trend of the market closely, so 
that the margin will be maintained at all times. In his de- 
sire to make money for the bank, he must analyze with 
minute care stocks that have a narrow market, stocks that 
are subject to wide fluctuations and stocks of doubtful in- 
trinsic value brought into prominence through manipulation. 
If stocks of this description are accepted by the loan clerk 
he should see to it that they form only a small percentage of 
the collateral. In making substitutions, "substitution 
sheets" are used. These are filed with the securities and 
show the authority for making changes in the loan collateral. 

As substitutions are made they are added and the old 
records crossed off. If only part of the securities are re- 
moved, the figures are changed. The intent of the record is 
to keep track of all the securities held on the loan and that 
the list shall be as in the envelope and the market values 
shown either on a card or on the envelope itself. 

Collateral loans are made frequently through brokers. 
As soon as the bank ascertains what it will have to loan for 
the day, after receiving the morning's clearings, it will com- 
municate with brokers and offer them funds at certain rates ; 
or, it may place the same in the hands of brokers on the 
stock exchange floor to be loaned out to clients, the borrower 
paying a small commission for the favor. 



230 THE PRACTICAL WORK OF A BANK 

When the Due Date Arrives 

When the due date arrives, the note must be paid, or re- 
newed, and it, therefore, follows that we must turn it into 
money or into a new obligation. Custom decrees that makers 
be given ten days' notice of maturing paper and it is neces- 
sary that the maturing notes be sent to the correspondent 
for collection in due time so that such notice may be given. 
In the case of home paper, of course, the notices can be sent 
each day for the maturities of ten days in advance. By con- 



ra fa 
S 

I 



CONTINENTAL BANK & TRUST CO. 

SHREVEPORT, LA. 

We hold your Note jor $ l t 000.00 

Which will be due ^ zz ^ 19%z Interest, $ 2o #00 

Endorsed by John Jone8 & CqU Total, $ i t0 20I00 



Mr. Jaa. Smith, 

1014 Texas Street, 
City. 



lit! 

U> V3 <S ff 

So 9* 

sssf 

o-Eg* 



NOTICE TO BORROWER OF MATURING NOTE 



suiting the maturity tickler out-of-town items may be for- 
warded and notation made in the proper space. Some banks 
keep the foreign items separately. 

In clearing-house cities notes due are sent through 
the clearing-house, unless by custom they are collected by 
messenger. For instance, in Boston, notes of over $2,500 are 
presented through messengers, while under that amount 
through the clearing-house. 

Notes paid or charged to the customer's account are cred- 
ited to bills receivable, and the balance of the discount regis- 
ter, maturity tickler and total of the notes themselves should 
agree with the balance of the controlling account on the gen- 
eral ledger. Items in the form of notes sent out for collec- 



LENDING THE BANK'S MONEY 231 

tion are charged to the collection department as any other 
collection. Notes falling due in other places may be charged 
to the bank to which they are sent, to be charged back if not 
paid, if the bank be a correspondent, or charged to the tran- 
sit account as a collection item to be collected and credit 
passed, or sent out on memorandum. As soon as the note 
leaves the loan department it is credited to the bills receiv- 
able account, and charged to "collections" or "transit ac- 
count," and when payment is made or credit passed upon 
advice of payment, the transit account or collection account 
is credited, and the collecting bank charged. 

In discounting notes payable out of town, the exchange 
is taken out at the time of discount, and is no longer a charge 
against the collection of the note. If the item is protested,, 
it must be taken up by the borrower and the fees paid in 
addition ; or if payment cannot be obtained at once, it is car- 
ried in a suspense account for later adjustment. 

Unearned Discount 

When the discount is made, the interest is deducted and 
credited as an earning. This, of course, makes the period in 
which the note is discounted show an earning that may lap 
over into another period. For instance: A loan of $100 is 
made March 1st, due July 1st. The dividend figures are 
made up on April 1st. To consider the interest for the full 
time as an earning for the period ending April 1st is to de- 
ceive ourselves, and only that part of the earnings which 
properly belong in the period should be reckoned as an 
earning. Therefore the interest for March only is properly 
part of the earnings for the period, and all well-managed 
banks endeavor to so apportion interest earnings. 

Likewise, loans where the interest is paid at maturity 
must have the earnings for the time they have run until divi- 
dend time entered as accrued interest, thereby swelling the 
earnings of the bank by the amount due but unpaid. These 
accruals can only be determined by taking each note and 
apportioning the interest over the term, entering under each 
month the interest that is earned during the month, so that 
at any time the true earning power may be known. 

Mr. Howard M. Jefferson, auditor of the New York 
Federal Reserve Bank, has made a specialty of accrued in- 



232 



THE PRACTICAL WORK OF A BANK 



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LENDING THE BANK'S MONEY 



233 



Dr. 



INTEREST ACCRUED 



Cr. 



Date 


Memoranda 


Amount 


Date 


Memoranda 


Amount 


June 
u 

ti 

tt 

July 

a 


27 
28 
29 
30 
1 
4 


Int. Acc'd Rec. 

n ti << 

it It It 

it tt ti 
it It tt 
it tt it 

Total 


$4 
13 
17 
13 
28 
90 


44 
47 
64 
19 
19 
83 


June 
July 


30 
5 


Cash 

a 

Total 


$ 13 
154 


03 
43 




$167 


76 


$167 


76 



















Note: The credit entry of $13.03 should be $13.33. Form was photographed 
as Mr. Jefferson had it.— W. H. K., Jr. 



Dr. 



INTEREST ACCRUED RECEIVABLE 



Cr. 



Date 


Memoranda 


Amount 


Date 


I 
Memoranda 


Amount 


June 


30 


Profit and Loss 
Total 


$48 


74 


June 

u 
li 


27 
28 

29 
30 


Int. Accrued 

tt a 

a a 
a a 

Total 
Int. Accrued 

it a 


1 
84. 44 
13.147 
17. 64 
13.119 




$48 


74 


$48 . |74 








July 


1 
4 


S28. 
90. 


19 

S3 



234 THE PRACTICAL WORK OF A BANK 

terest receivable and payable and in the text book on 
"Banking" of the Alexander Hamilton Institute course says 
in this respect : 

"A very simple method of accruing interest receivable 
day by day on loans will be explained in detail. Application 
of this principle may be made to bonds and mortgages,, 
stocks and bonds, interest payable on accounts and certifi- 
cates of deposit. 

"A columnarized sheet as shown in Form A will do for 
the daily record. Accounts should be set up in the general 
ledger as shown in Forms B and C. The accounts shown in 
Forms D and E will already be on the ledger. We will 
carry the work over the end of the fiscal period to show 
how the books would be closed and will, therefore, begin 
our record on Monday, June 27, and run to Wednesday, 
July 6, closing the books on June 30. 

"The following transactions take place: June 27, loans 
made, $20,000 at five per cent and $10,000 at six per cent. 
These loans should be entered as per Form A. At the end 
of the day, which is equal to the opening of the day follow- 
ing, 'interest accrued' is charged and 'interest accrued re- 
ceivable' is credited with one day's interest on the loans 
made at the respective rates. 

$20,000 at 5% for one day $2.77 

10,000 at 6% for one day 1.67 

Total (See Forms B and C) $4.44 

"If the loans are not very active, the same sheet may be 
used from day to day. If very active it will be better to 
open a new sheet each day with the balances outstanding at 
the various rates on the day previous. 

"On the 28th two new loans were made, $50,000 at four 
per cent, and $25,000 at five per cent. These are entered in 
the proper columns on the daily sheet. At the close of the 
day 'interest accrued' is charged and 'interest accrued re- 
ceivable' is credited with one day's interest on the total 
amount of loans held by the bank at the various rates as 
follows : 

$50,000 at 4% for one day $5.55 

45,000 at 5% for one day 6.25 

10,000 at 6% for one day 1.67 

Total (See Forms B and C) $13.47 



LENDING THE BANK'S MONEY 235 

"On the 29th three loans of $10,000 each are made at 
four, five and six per cent, respectively and entries made as 
per the figures. The accrued accounts receive the entries on 

$60,000 at 4% for one day $6.67 

55,000 at 5% for one day 7.64 

20,000 at 6% for one day 3.33 

Total (See Forms B and C) $17.64 

"On the 30th two loans are paid with interest, $20,000 
at five per cent., the company receiving three days' interest 
amounting to $8.33, and $10,000 at six per cent., the com- 
pany receiving three days' interest amounting to $5.00. 
These payments are entered on the daily sheet in red and de- 
ducted from the balance of the previous day. The $13.33 
received as interest is charged to 'cash' and credited to 'inter- 
est accrued' as per Forms B and D. The accrued accounts 
receive the usual charges and credits for the interest on the 
balances in the loans at the different rates : 

$60,000 at 4% for one day $6.67 

35,000 at 5% for one day 4.86 

10,000 at 6% for one day 1.66 

Total (See Forms B and C) $13.19 

"At this juncture the books are closed for the six months. 

^Interest accrued receivable' is closed into 'profit and loss.' 

"On July 1 two new loans are made, $75,000 at four per 

cent, and $40,000 at six per cent. The usual entries are 

made in the accrued accounts : 

$135,000 at 4% for one day $15.00 

35,000 at 5% for one day 4.86 

50,000 at 6% for one day 8.33 

Total (See Forms B and C) $28.19 

"The second, being Saturday, but one loan is made, 
$15,000 at five per cent. Sunda}^ and Monday being holi- 
days it will be necessary to accrue for three days instead 
of one : 

$135,000 at 4% for three days $45.00 

50,000 at 5% for three days 20.83 

50,000 at 6% for three days 25.00 

Total (See Forms B and C) $90.83 



236 



THE PRACTICAL WORK OF A BANK 



Dr. 



CASH 



Cr. 



Date 


Memoranda 


Amount 


Date 


Memoranda 


Amount 


June 
July 


30 
5 


Interest Accrued 


$ 13 
154 


33 
43 













FORM D 



Dr. 



PROFIT AND LOSS 



Cr. 



Date 



Memoranda 



Amount 



Date 



June 



30 



Memoranda 



Interest Acc'd 
Receivable 



Amount 



$48 



74 



"On the fifth all loans are paid with interest as follows: 

$50,000 seven days at 4% $38.89 

25,000 seven days at 5% 24.31 

10,000 six days at 4% 6.66 

10,000 six days at 5% 8.33 

10,000 six days at 6% 10.00 

75,000 four days at 4% 33.33 

40,000 four days at 6% 26.66 

15,000 three days at 5% 6.25 

$235,000 . $154.43 

"The interest received, $154.43, is charged to 'cash' and 
credited to 'interest accrued,' closing the latter. 

"The paid loans are entered in red on the daily sheet and 
deducted, leaving no loans on which to accrue interest at the 
close of the fifth day. 



LENDING THE BANK'S MONEY 237 

"It is a little difficult to apply this system to deposits 
upon which interest is paid on average daily balances, but 
even this may be accomplished if these accounts are segre- 
gated from the non-interest bearing. It may be applied with 
no trouble at all to certificates of deposit and other special 
accounts." 

Accounts Receivable as Collateral 

There is a class of collateral loans that is coming to be 
common in banking, but more especially in mercantile circles, 
based upon accounts receivable. Where a merchant is not in 
the best of credit, and has no better security to offer, and 
cannot borrow on his own name unsecured, and does not 
take notes from his debtors, he may pledge his accounts re- 
ceivable, meaning his book accounts. Next to cash these are 
his most liquid asset and his best security (if good) and 
some banks will loan on the strength of these accounts. They 
are usually assigned to the lending bank, and notice served 
on the debtors that the accounts have been pledged and that 
payment must be made to the bank instead of the merchant. 
At times the accounts are merely pledged and collections 
made in the usual way. 

There are "commercial bankers" who make a business of 
loaning on, or, to speak more correctly, buying, these ac- 
counts. There is also what is known as the "factor," or com- 
mission merchant, who not only sells goods for customers 
and mills for whom he acts as selling agent, but also finances 
manufacturing operations. It is done largely through the 
medium of the accounts receivable. A simple illustration 
will show how these operations are carried on. Let us sup- 
pose a manufacturer of woolen cloth sells a bill of goods to 
a well-known clothing firm. The terms of the sale are three 
months, with a discount. The manufacturer cannot wait 
that long for his money, being short of capital funds, and 
has no banking connection that will loan on his note or on 
his accounts receivable. He, therefore, arranges with the 
factor to buy this account, and the factor will do so. The 
latter operates a very finely organized credit department 
that keeps in touch with all leading merchants the country 
over and can judge the credit risk with considerable accu- 
racy. The factor will advance the manufacturer, say, eighty 



238 



THE PRACTICAL WORK OF A BANK 



per cent, of the amount of the bill, and charge him interest 
at the legal rate for the time it has to run. If the twenty 
per cent, is also desired, which in effect is a guaranty of 
payment of the full amount of the bill, the factor will charge 
an extra percentage for the risk he runs. The bill is as- 

* Interest Statement 
Rate % 



In Account with the 

Guaranty Trust Company of New York 



Date 



From 



To 



Balance 

(Hundreds)" 



No. 

of 

Days 



Aggregates 

(Hundreds) 



Interest 



INTEREST STATEMENT 



signed to the factor and the advance made in cash. Some 
manufacturers and merchants do this as a steady policy, so 
much so that their bill-heads are printed: "This bill assigned 
to Blank & Company, Factors, and all payments must be 
made direct to them." 

A bank making advances on such accounts must know 
that they are bona fide debts, and that the debtors are good 
for the amount of the bills. Considerable margin is allowed 



LENDING THE BANK'S MONEY 239 

for the shrinkage inevitable in all such matters and when 
made with a reliable firm, and ample margin allowed, are a 
good security, but not in general favor. 

Interest 

The banking custom, sanctioned by law, is to consider 
360 days to the year, thirty days to the month and charge 
discount for every day from date of credit to date of ma- 
turity, excluding the former and including the latter. 

The rate of interest changes frequently on "Street 
Loans." Payment of interest is usually made monthly. The 
interest can be calculated by multiplying the rate per cent, 
by the number of the days it stood at that rate, or by the 
use of interest ta bles. 

Find total of these products, add four decimal places, 
then divide by thirty-six. The answer will be the interest 
on $100,000.00 in dollars and cents. Thus, $100,000.00 
loaned Oct. 1, 1910, at three per cent., changes Oct. 4 to 
two and one-half, Oct. 8 to four per cent., and Oct. 10 to 
three and one-half, paid Oct. 15, 1910: 



Oct. 1 to 4 at 3 per cent. 3 days $9.00 

10.00 
8.00 



uct. l to % at 3 per cenr.. a aays 
Oct. 4 to 8 at 2y 2 per cent., 4 days. 

Oct. 8 to 10 at 4 per cent., 2 days o.uo 

Oct. 10 to 15 at 3y 2 per cent., 5 days 17.50 

$44.50 
36)44.5000(123.61 



85 

72 

130 

108 

~220 
216 

~40 
36 



Some banks keep a daily skeleton balance ledger of the 
loans at the rate per cent, the loans are made, posting the 
new loans and payments under the rate per cent. This 



16 



A5d6p Daily Balances 


of 


with Guaranty Trust Company of New York. 


Interest Account for Month ending 191 






Br. 


Or. 






26 














27 














28 














29 














30 














3i 














2 














3 














4 














5 














6 














7 














8 














9 














10 • 














11 














12 














13 














14 














15 














16 














17 














18 












if 


19 
20 
21 
22 














23 
24 
25 














Inte 


est 














^ 






- 



INTEREST STATEMENT BASED ON DAILY BALANCES 



240 



LENDING THE BANK'S MONEY 241 

enables the bank to tell at once just at what rates all the 
loans stand. 3 

In discounting interest-bearing instruments, it is the cus- 
tom to discount the interest as well as the principal. A note 
of $1,000 running one year and bearing interest at six per 
cent, amounts to $1,060, but when discounted the amount of 
the proceeds would be $996.40 and not $1,000. 

It is a good custom each week to make out a maturity 
sheet, showing a list of notes due during the following week 
for which a part renewal may be asked. Record on this 
sheet makers and indorsers, amount, when due, total due on 
own paper and receivables, also the average balance for the 
past six months. This enables the officers to look the matter 
up before the request for renewal is made. 

Occasionally the officers or directors want to know the 
amount of unearned interest, that is, the amount that would 
be charged to profit and loss if every note was rebated. 
First find the average rate by multiplying each rate by the 
total discounted at that rate, add the results together and 
divide by the total amount under discount. Then find the 
average time by multiplying total of each day's notes by 
number of days they have to run; add the results of these 
totals, and divide by total amount under discount. Having 
the average rate, and the average time, you can easily tell 
amount of unearned interest. 

In a book with an index, having spaces ruled off on each 
page, keep a profit and loss record of unpaid matured dis- 
counted paper. Have each space numbered. In these 
spaces record a full description of each item — to whom it 
has been turned over for collection, if any part payment is 
made, etc. 

The items themselves, or a copy, if they are out of your 
possession, should be placed in envelopes and these envelopes 
marked with the same number as the space in the profit and 
loss record. These envelopes should be filed numerically so 
the paper can be readily located, however many years it may 
be old. The envelopes save the items from wear and tear. 4 

It is not the custom for banks to give receipts for collat- 
eral, for the receipt would be evidence of the existence of the 

3Wm. M. Rosendale, Assistant Cashier Market & Fulton National Bank, New 
York, before Pittsburgh Chapter, A. I. B. 

4 Wm. M. Rosendale in Bankers Magazine. 



242 THE PRACTICAL WORK OF A BANK 

collateral and the ownership in the borrower, and might lead 
to hypothecation and other irregularities. And where sub- 
stitutions are frequently made, as is the case in stock ex- 
change loans, these receipts would be a nuisance and are 
given if at all only under protest and are most generally 
refused. 

Payment of Call Loans 

The New York Stock Exchange has no set rules govern- 
ing loans. The payment of call loans may be demanded up 
to one o'clock, and custom requires that they shall be paid 
by two o'clock. The law, however, gives them until three 
o'clock. The time up to which renewals may be made on 
call loans is one o'clock. The renewal rate on call loans is 
made in accordance with the supply and demand on the floor 
of the New York Stock Exchange any time before one 
o'clock. After the stock exchange rate has been communi- 
cated to the various offices renewals of the entire list are 
made on that basis between lender and the borrower direct. 
The rate of money after one o'clock frequently differs from 
the renewal rate. 

Receipts for the return of the collateral are taken on the 
cards. All letters, memoranda, etc., are filed in the enve- 
lopes. It is also a good plan when stamping the note "Paid" 
to have it read "Collateral Returned." If there is anything 
in a loan that requires attention on a certain date, record it 
under the proper day in a diary or better by card system. 

Loaning for the Bank's Correspondents 

When the country banker decides that his New York ac- 
count is not earning enough, and makes up his mind to loan 
in the market on his own account, he will so notify his cor- 
respondent. When rates are high this is in vogue and the 
country banks benefit; when rates on call loans are low, the 
funds will be placed back on interest, usually at two per 
cent., and the city bank loses. These loans are usually made 
to stock exchange firms, and are payable on demand. There, 
is what is called the participation loan, by which several 
small banks, not being willing, or being prohibited from 
loaning an amount sufficiently large to go into the market 



LENDING THE BANK'S MONEY 243 

(Wall Street loans being in the sum of $50,000 or over, as 
a rule), several banks may combine, and through the city 
bank, or the bank acting for several, make a participation 
loan, each bank sharing in its proportion. 

All that has been said regarding demand loans is ap- 
plicable here, the principles being the same. In the National 
Park Bank the following method is pursued: Upon receipt 
of a request from a correspondent to make a demand loan, 
the amount is charged directly against the account of that 
correspondent through the cashier's check book, when the 
check is drawn and delivered to the broker to whom the loan 
is made. Upon payment of the loan, the broker's check is 
credited to the account of the correspondent through the 
general book in the note teller's department. The color of 
the cashier's check delivered to the brokers, and of the card 
showing the record of the collateral for loans made for cor- 
respondents is yellow ; so that at a glance the auditor and his 
assistants can classify the loans made for customers, since 
the checks and cards used in loans made for the bank are 
white. This method of keeping the records of loans for cor- 
respondents makes it possible for the auditor to eliminate 
these figures from the general proof of the bank's work. The 
auditor receives from the loan department each day and 
enters in a memorandum book the total amount of loans 
made for correspondents, as well as the total amount of loans 
paid on account of correspondents ; the difference represents 
the amount of loans outstanding. This method combines 
simplicity with safety. 5 

Warehouse Loans 

A warehouse or commodity loan is one based upon com- 
modities held by a warehouseman and evidenced by ware- 
house certificates. It is essentially the purchase of the goods 
for the account of the borrower and the loan is as good as the 
goods and no better. The essentials are the same as in all 
collateral loans and all that has been said under collateral 
loans here applies. There is, however, the danger of deteri- 
oration in merchandise that does not obtain in the case of 

5Wm. C. Macavoy of the National Park Bank, New York, before New York 
Chapter. 



244 



THE PRACTICAL WORK OF A BANK 



Guaranty Trust Company of New York 

140 BROADWAY 

New York, , 



For purpose of audit and verification we beg to advise you that we are 

loaning you at the close of business to-day,, the sum of $ 

with securities mentioned below as collateral. 

If the amount and collateral is correct, kindly sign acknowledgment at 
the foot of this statement and return at once in enclosed envelope. 

Yours very truly, 

RALPH DAWSON, 

Auditor. 



The above statement is correct 



VERIFICATION OF COLLATERAL, LOAN SENT TO BORROWER FOR SIGNATURE 

security loans, the physical qualities being no element in the 
latter and the vital factor in the former. 

In the first place, we must have a bona fide warehouse 
receipt, properly executed, as evidence that the property is 
in the custody of the warehouseman ; second, the goods must 
be what they purport to be, and, thirdly, they must be in 
good condition. As evidence of the former, the bank mak- 
ing the loan must know the signatures and forms of the 
warehouse as it would know the signatures on a check. To 
verify the condition of the goods only physical inspection 
can assure quality and quantity. A receipt acknowledging 



LENDING THE BANK'S MONEY 245 

so many barrels "said to contain" a certain article, might 
contain something else. 

Banks should loan, if at all, only on staple products, in 
steady demand, not subject to fashion, and with a fair mar- 
gin for shrinkage. 

It is conceded that the risk in warehouse loans is consid- 
erable on account of the physical difficulties; but inasmuch 
as it is the business of the bank to assist commerce and in- 
dustry, it is needful and proper that it assume legitimate 
risks for the good of the common weal; and the bank that 
will not assume the risks of trade is not fulfilling its right- 
ful place in the economic scheme. If every bank were to 
require security in the form of lawful money (and banks 
have made loans on actual money, the owner requiring the 
identical bills in a few days, and chose to obtain a loan rath- 
er than take the chance and trouble of getting others) they 
would be asking impossible security; while the woman who 
wanted a loan on her fire insurance policy was offering secu- 
rity of the other extreme. Somewhere in between the two 
lies the middle ground of safety and service. 

Granting that the borrower meets the conditions named 
in the chapter on "Essentials in Granting Credit," and the 
receipt is bona fide, our chief concern will be with the class 
of goods. 

As above stated, they must be staple. To loan on orna- 
ments for my lady's dress would not be very good banking; 
but to loan on silk to make it for her would. The latter 
security would be stable, both in price and in demand. Of 
this class are loans on wheat, cotton and other cereals. 

But the wheat should be of the quality claimed, and 
this can be ascertained by requiring the inspection certifi- 
cate issued at the ports on the Great Lakes, or in New 
York, and which are recognized everywhere as authentic 
certification of the grade. And wheat so graded will hold 
its grade the world over. Wheat flour is good security, but 
apt to spoil under unfavorable conditions. Corn will "heat" 
if improperly kept. Only a recent inspection certificate will 
safeguard these tendencies. Cotton is ordinarily prime secu- 
rity. Its value may be ascertained at any time; but the 
cotton must be cotton and not the fag ends of the picking 
— linters. 

The prices of staple commodities may be ascertained 



246 THE PRACTICAL WORK OF A BANK 

from public quotations in the trade papers, which are gen- 
erally reliable, but at times should be checked up independ- 
ently, to be certain that prices are not "washed" for an oc- 
casion. The goods, of course, must be insured, and certifi- 
cates of this fact required. Having an authentic document, 
goods of the weight and quality claimed, at an ascertained 
price and insured, and a margin for shrinkage, both in price 
and quantity, and a responsible borrower, the loan is as safe 
as the needs of men are constant. 

Bills or Lading 

The bill of lading is an instrument acknowledging the 
receipt of certain goods to be transported under stipulated 
conditions. When issued in certain form it contracts to de- 
liver the goods to the consignee only, or on his order, and 
the delivery of the bill of lading is necessary to obtain the 
goods, and possession of the bill is warrant to the carrier to 
deliver. In other forms the bill is not required as a requi- 
site to delivery. 

It is, of course, as history has demonstrated, an easy 
matter for a railroad agent to issue a bill which represents 
nothing but a fraud. Such blanks are easily obtained, and 
easily issued, and gross frauds and severe losses have been 
visited upon American banks through bogus bills of lading. 
The tendency of the times is to require the transportation 
companies to use due care in the selection and authorization 
of agents and to hold them responsible for fraudulent bills. 
The cotton frauds of a few years ago in the Knight, Yancy 
matter in the South arose through bogus bills of lading. 
Fraudulent bills were issued, and on the strength thereof, 
drafts were drawn, sold and sent to Europe for payment, 
only to find that the cotton supposed to follow did not exist, 
and the bill of lading a forgery. The case is still in the 
courts, but thus far it has been held that the one accepting 
and paying the drafts must lose, as the drafts were accepted 
on the credit of the drawer and not on the cotton fictitiously 
shipped. 

The dangers arising from bills of lading shipments are 
indicated by a set of instructions sent out by the American 
Bankers Association about three years ago. Summarized 
they are as follows: (a) Except in a few States, a bill of 



LENDING THE BANK'S MONEY 24? 

lading does not guarantee delivery of the article listed in the 
bill. The road is responsible only for the goods actually 
received, even though the agent signed for more, (b) The 
bill of lading does not guarantee the quality of the goods. It 
gives a list merely of the goods as furnished by the shipper. 
So many boxes "said to contain" — of a certain weight, (c) 
It may be issued in fraud and, therefore, not binding upon 
the company, (d) Bills may be issued in sets, and dupli- 
cates outstanding not marked and delivery already made on 
the original, (e) Part of the goods may have been deliv- 
ered, and not endorsed on the bill, (f) The goods may 
have deteriorated. 

There is now issued by all leading railroads the uniform 
bill of lading, which has standardized the form, so that it is 
easily recognized. The "order" bill of lading makes indorse- 
ment necessary in order to secure the goods. Thus, a bill 
might consign goods to order of "William Williams" and 
he must indorse the bill to obtain delivery, and the com- 
pany will not deliver the goods without the bill. The other 
form is the "direct" bill, which contemplates delivery with- 
out the bill and goods consigned on such a bill to "William 
Williams" will be delivered without the bill to anyone who 
represents him. 

Bills issued on grain shipments on the Great Lakes are 
in sets, and possession of any one of the set is sufficient to 
warrant delivery, and in such cases the entire set must be 
delivered as a requisite to a loan. 

Mr. Thomas B, Nichols, assistant cashier of the Produce 
Exchange Bank of New York, which deals largely in such 
loans, and from whom many of the foregoing suggestions 
have been obtained, suggests as a safeguard against 
forged bills that the arrival notice be required. This is sent 
to the consignee when the goods arrive, and by checking the 
name, goods, date and car number, the authenticity may be 
established. The cotton frauds mentioned above have re- 
sulted in a validation bureau, the cotton bills being certified 
to as genuine by the railroad issuing the same, and copy for- 
warded to the validation bureau in New York which com- 
pares the bills and attaches its certificate that the bill is gen- 
uine. Stale bills — bills that are old — should be investigated 
very carefully. Goods may have been sidetracked, spoiled, 
damaged or destroyed, and an old bill is a red flag of dangair, 



248 THE PRACTICAL WORK OF A BANK 

Elevator receipts are in the nature of warehouse receipts, 
these being for grain held in storage and in process of trans- 
fer to another carrier. A loan on goods in transit is prac- 
tically the same as on goods in storage. Large amounts are 
constantly outstanding secured by grain en route from the 
West to New York. The bills of lading and draft traveling 
faster than the goods, are, nevertheless, pledged, and ad- 
vances made, the security attaching wherever the goods 
mav be. 

A very excellent paper on "The Discount Department" has been written by 
Herbert E. Stone of the Second National Bank, Boston, from which much 
information may be gathered and to whom acknowledgement is here made for 
suggestive thoughts in this chapter. 



CHAPTER X. 

THE BANK AS AN ACCOUNTING MACHINE 



The purpose of accounting, whether financial or mer- 
cantile is (1) to show a chronological record of the trans- 
actions which occur in a concern that affect the increase or 
decrease of values; (2) to determine the financial position 
at any given time — the possession of and liability for values ; 
and (3) to determine the profit or the loss for the period. 

The accounting records if properly kept will show (a) 
what the concern owns on the one hand, and (b) what it 
owes on the other. They will show from whom value was re- 
ceived and to whom value is due. And that accounting sys- 
tem is wrong in principle and technique that does not accu- 
rately record these facts and bring them to a focal point at 
stated times, omitting nothing that properly belongs in these 
records. 

Presentation of Accounting Facts 

It is a principle of accounting that the financial condition 
of an individual, firm or corporation can best be understood 
by a simple statement conveying a single idea, which ex- 
presses much in that idea. Thus, we may state that a man is 
worth a million dollars. This conveys a single idea of his 
aggregate wealth. We may then amplify the idea, divide 
and sub-divide the constituent parts into as many as may be 
necessary to designate precisely of what the original state- 
ment is composed. We, therefore, proceed to classify his 
wealth into two forms, real and personal, by saying that he 
has half a million in real estate and half a million in stocks 
and bonds. We then classify the stocks and bonds and real 
estate into sub-divisions, so that in the process we have 
analyzed the elements that constitute his aggregate wealth. 
We may present this idea as follows: 

r Factory properties 
J Tenements, 



Total 

wealth, 

$1,000,000 



Real estate, 
$500,000 



Stocks and 
bonds, 
$500,000 



Apartments, 

Railroad stocks, 
Industrial stocks, 

r Municipal, 
Bonds J Rails, 

L Public Utility, 



$100,000 (Details) 
200,000 (Details) 
200,000 (Details) 



$100,000 (Details) 
100,000 (Details) 

$100,000 (Details) 
100,000 (Details) 
100,000 (Details) 

249 



250 THE PRACTICAL WORK OF A BANK 

Upon this idea all bookkeeping rests. There must be 
the recording of details, the aggregation of these details, first 
in one record which assembles and classifies the original 
transactions, from which they are carried to controlling ac- 
counts, and these into a statement or balance sheet which 
summarizes the whole process for ready reference. We have, 
therefore, a record of the transactions and the result of the 
transactions. And the bookkeeping system that does not do 
this is weak at its basic point. 

The Accounts of the Bank 

The accounts of a bank differ somewhat from the ac- 
counts in a mercantile house in that the records of a bank 
all have to do in the main with cash. There is no merchan- 
dise to handle or account for; no "accounts receivable," for 
nothing is sold; no returned sales or inventories. Bank 
bookkeeping is an exact science. 

And yet between mercantile and financial accounting 
there is some agreement. We have many accounts payable 
— not for merchandise bought, but for money deposited. We 
have no cash discounts ; but we do have exchange, which cor- 
responds. And if we take no inventory of stock, we do 
verify the bonds and commercial paper. We render state- 
ments of reciprocal accounts and have the "account stated" 
of the mercantile world. We buy cash for credit and pay 
credit in cash. The bank has a single unit — the dollar; the 
merchant the yard or the pound as measured into the dollar. 

Bank accounts may be divided into three classes: 
(a) The accounts with persons and corporations; (b) the 
accounts with property, real or personal, but mostly per- 
sonal; (c) the nominal accounts. To these might be added 
the general or controlling accounts, from which is made up 
the statement of condition or balance sheet. 

The accounts with individuals — depositors, and with 
banks, which are in a sense depositors — measure the indebt- 
edness of the bank for money deposited. The accounts with 
property record the investments, collections, transit items, 
etc. (property of the bank in process of collection, or prop- 
erty of the depositor to become property of the bank), and 
other property of the bank; while the nominal accounts 
record such items as expenses, interest, profit and loss, etc., 



BANK ACCOUNTING 



251 



ACCOUNTS OPENED 
DATE 



NAME 


ADDRESS 


AMOUNT 


BC8INESS 













ACCOUNTS CLOSED 
DATE 



NAME 


ADDRESS 


Date 
Opeiied 


BALANCE 


AVERAGE 
BALANCE 


Business 



















RECORD OF ACCOUNTS OPENED AND CLOSED FOR GUIDANCE OF OFFICERS 

and assemble or hold in abeyance the amounts for a time 
which are periodically closed out into the controlling ac- 
counts. Of course, all accounts are representative of cash 
in some form, for the bank handles nothing else, and the 
records all have to do with the increase or decrease of cash 
values near or remote, and the elements which affect these 
values. 

Banks Agree in Essentials 

Essentially the same work must be done in every bank, 
whether it be large or small. The difference lies, not in the 
way it is done particularly, but who does it. In a large city 
bank the receiving teller may simply prove the cash as it 



252 THE PRACTICAL WORK OF A BANK 

t 
comes in over the counter, leaving the verification of the 
checks, their endorsements and the proof of the ticket to his 
assistant or clerks in the "block system proof" (which see), 
while the teller in a small bank will do it all himself. 

Likewise the collection clerk. He may have charge of 
nothing but the collections of the bank, while this may be 
but part of the many duties of the general bookkeeper 
of the country bank. As banks grow in size, the work 
must be divided and sub-divided into as many parts as need- 
ed in order to make a finely organized piece of machinery, 
but the seemingly complex machine with hundreds of men 
does no different work than the more simple machine that 
runs with three. And when in this work we speak of turning 
an item over to a department, we mean that it goes through 
a certain process as well as through a distinct department of 
the bank's work. 

It is impossible to describe the bookkeeping of the aver- 
age bank, for the "average bank" does not exist; we must 
either take a large city bank; a bank in a moderately large 
city or a country bank; but wherever the bank exists, or 
whatever the size, certain fundamentals of the bookkeeping 
must be observed in order to keep the records in proper 
shape. These records expand with the changing needs of the 
business ; but in their essentials they all agree. If we under- 
stand a large bank we shall easily understand a small one, 
since those departments of a large bank which are necessary 
to the conduct of the small one are condensed or combined 
with other work. 

Thus the credit work may be finely organized into a dis- 
tinct department, and have elaborate information regarding 
borrowers at hand, and officers who specialize in different 
lines of business; but in a country bank the cashier must 
have, somewhere in his head, the same information if he 
would extend credit wisely. If a hardware dealer applies to 
a certain Chicago bank for a loan, he will be referred to the 
vice-president who knows the hardware line and follows it 
closely; but if he makes application to the little bank the 
cashier must know practically the same things about the 
hardware business if he would act with discretion. It is the 
difference between the general practitioner and the specialist. 



BANK ACCOUNTING 253 

Fundamentals Alike in all Banks 

The fundamentals of practical banking are alike in all 
banks, the difference being in the methods and machinery 
by which the fundamentals are put into execution. Thus, 
there is the department of receiving and paying money, mak- 
ing loans, keeping books, rendering statements, and direct- 
ing the policies of the institution. The work may be highly 
departmentized, or done by a force of three or four men; 
but the same work must be done in its essence. While no 
two banks are alike in their details, the work as a whole fol- 
lows lines more or less standardized. 

If the student understands the nature and intent of the 
work in mind, the tools with which to accomplish the results 
will readily be found, and too much minutia leads to confu- 
sion. Moreover, to describe books of record is not as inter- 
esting as to see them, for that is the purpose of illustrations ; 
and to understand them one must see and not simply read 
about them. In other works will be found many of the 
present-day systems which are old and tried in their funda- 
mentals, as well as in their machinery, and to attempt here to 
describe the different books of record in minute detail would 
be to repeat what other authors have said, which is far from 
the present purpose. Therefore, we will confine ourselves 
to broader views, and refer to other works as occasion 
warrants. 

Corporate Records 

The records of a bank may be divided into: (a) The 
corporate records and (b) the financial records. The cor- 
porate records consist of ( 1 ) the minute book ; ( 2 ) the stock 
ledger; (3) the stock certificate book; and (4) the stock 
transfer book. All other records are financial and not cor- 
porate. 

The minute book should contain a complete chronological 
record of the corporate affairs of the bank. The election of 
officers, their terms and compensation, amendments to by- 
laws, issue of capital, declaration of dividends, ratification 
of loans, and all matters which come before the board of 
directors, are recorded in the minute book. 

The record is best kept in typewriting, and the bound 
book is recommended as the safer way, inasmuch as the cor- 



254 THE PRACTICAL WORK OF A BANK 

porate history and the formal procedings of the directors 
are of utmost importance and should not be open to the 
frauds and abstractions possible in the loose leaf. The book 
typewriter is, therefore, a helpful adjunct to this end. 

The record should begin with the place and date, the 
fact that the meeting has been duly called and who presides. 
Then follows the names of those present, in order to show 
a quorum, and to fix responsibility for the acts there done. 
The minutes of the last meeting are read and approved, and 
routine business transacted, following the prescribed order 
laid down in the by-laws. This usually takes the form of 
reports and resolutions. The former are incorporated in the 
record in full or referred to as "on file," while the latter 
are transcribed in full, giving the name of the one who of- 
fers, the one who seconds, and the adoption or rejection of 
the resolution. Some matters require roll call and others a 
mere "aye and nay" vote. The minutes are duly attested by 
the secretary or cashier, and become the official history of 
the bank. 

They should be carefully indexed as to names and sub- 
jects, every proper name being indexed and every subject 
and resolution indexed and cross-indexed if necessary to 
make ready reference possible. 

Stockholders' meetings are recorded in the same manner, 
the number of shares held by each stockholder present in 
person or by proxy being also stated. 

The minute book should contain a history of the bank as 
it is made in the board meetings. It should fully set forth 
the proceedings, and completely describe the action taken. 
Some banks record the vote on every question submitted, 
even to calling the roll on every loan; but this would seem 
needless except in those cases where the law requires roll 
call, or in matters where dispute has arisen, when the vote 
should be fully recorded. In routine matters, details of the 
vote are not essential. 

Record should also be kept of every director, when elect- 
ed, when resigned, when deceased, etc., for biographical and 
historical purposes. In elections, the law must be closely 
followed, both before and during the meeting, so that the 
election may be regular. 

One of the functions of the board is to pass on loans, and 
where the volume is large, to cumber the records with offer- 



BANK ACCOUNTING 255 

ings would confuse the other records, and so an offering 
book may be used to list the offerings, and the action of the 
board on the various items indicated by proper entry, and 
certified to by the attestation of the cashier or other officer, 
and signed by the discount committee. The idea in mind is 
to fasten the responsibility for the loan beyond per- 
adventure. 

Reports of examinations by directors, public accountants 
and State and Government authorities should also be en- 
tered in the minutes. 

Stock Certificate Book 

The stock certificate book contains the certificates of 
stock which are evidence of the ownership of shares. This 
is similar to a check book in that it has a stub giving the 
name of the stockholder, date, number of certificate, number 
of shares and sometimes from whom the certificate was re- 
ceived for transfer after its original issue. Provision is also 
made for a receipt on the bottom of the stub for the ac- 
knowledgment of the receipt of the certificate. 

The stock book records the ownership of the stock in de- 
tail, giving the name of each owner. The Xew York law re- 
quires that a stock book be kept, setting forth in alphabeti- 
cal arrangement the names of stockholders, the address of 
each, number of shares owned, when acquired, and amounts 
paid thereon. 

Thus, if John Jones bought ten shares of the bank's 
stock on March 1, 1915, represented by certificate No. 210, 
and sold five shares to William Smith on April 1st. repre- 
sented by certificate No. 220, Jones receiving new certificate 
for five shares, the account would look like this: 







JOHN JONES 








Otf. 


Ctf. 




Amt. To whom 


Date 


issued 


cancelled Dr. Cr. 


Bal. 


paid issued 


Mch. 1, 1915 


210 


10 


10 


full 


Apr. 1, 1915 




210 10 




Wm. Smith (5) 


Apr. 1, 1915 


221 


5 


5 


full 



Account would then be opened with William Smith as 
was done for Jones. The total of this book as representing 
shares outstanding must equal "Capital Stock" account in 
the general ledger, which stands at the amount of authorized 
capital and is a credit balance. 

17 



256 THE PRACTICAL WORK OF A BANK 

In banks where the stock is active a stock transfer jour- 
nal is sometimes used, which is a chronological record of 
changes in stock ownership, giving on one side the date, 
number of the transfer, number of certificate, and from 
whom received and to whom the new certificate is issued. On 
the right-hand page is the same information as to the new 
certificate or certificates; for one certificate may be split up 
into several, and several might be combined into one. The 
journal merely records the transactions day by day as a 
guide for posting in the stock ledger. 

Stock Subscriptions 

Subscriptions to capital stock are generally paid for in 
installments (in a new bank) and receipts issued for the 
same. When the final payment is made the stock certificate 
is issued. The details are noted on the stub for record pur- 
poses and all certificates are numbered. Each must be ac- 
counted for, either as outstanding, or as having been issued 
and cancelled, or destroyed because of errors. Cancelled 
certificates are usually attached to the stubs. 

It is as important that there shall be a record of trans- 
fers as there shall be record of issues. When transfers are 
made, the old certificate should always be cancelled and new 
ones issued for the new allotments, so that each certificate 
will represent a certain number of bona fide shares out- 
standing, with a clear-cut record of their issue. Old certifi- 
cates are cancelled by stamping, or otherwise indicating 
their cancellation, or by slightly mutilating the signatures. 
A rubber stamp "cancelled" is quite sufficient. 

Transfer of Stock 

Authority to transfer stock may be made on the back of 
the certificate in places provided for such transfers, or by a 
separate instrument. Some banks have a transfer book for 
this purpose, but this prevents the transfer being recorded 
unless the parties are present, which does not always follow. 
Care should, of course, be taken to ascertain that the trans- 
fers are regular and forgery does not enter. Transfers 
made by agents, executors, trustees, etc., must have proper 
authority accompanying. 



BANK ACCOUNTING 257 

A record of stockholders should be kept, by name, ad- 
dress, number of shares held, when issued and address. As 
changes are made, the list is changed, so that a correct list 
of stockholders is always at hand, the total number of shares 
outstanding being the amount of the capital of the bank. 

Dividends 

Before declaring dividends, the earnings of the bank for 
the period must be ascertained, the expenses paid and ac- 
crued deducted, losses charged off, and from the net profits 
the dividend may be declared, after passing to surplus fund 
the amount required by law. The law usually stipulates 
what the minimum surplus shall be and what portion of 
the profits shall be carried to surplus until it reaches that 
figure. After this has been done, the dividend may be de- 
clared as the profits warrant. 

After being authorized by the board, the amounts are 
set opposite the various names entitled thereto, as of a cer- 
tain date (no transfers being made for a certain length of 
time in order to allow for the closing of the books and the 
paying of the dividend to the proper persons) and checks 
mailed to the various stockholders. The total amount of 
shares listed must correspond with the total stock authorized, 
and the total of the checks equal the dividend. The divi- 
dend checks are usually distinctive checks, indicating that 
they are dividend checks, and after the dividend has been 
credited to "Dividend" in the general ledger, the checks are 
charged against it as they come in, the unpaid checks repre- 
senting the "unpaid dividends" on the liability side of the 
statement. 

Reports of dividends are usually required by the super- 
vising authorities, the intent being to check the extrava- 
gance of the bank in respect to its distribution of profits. 

The Books of Record 

The books of record of a bank may vary to a certain de- 
gree, according to the size of the bank, but there are certain 
records that must be kept by all banks, whatever their 
methods or however small the bank may be. It is impossible 
to conduct a bank without them. As the business grows 



258 THE PRACTICAL WORK OF A BANK 

and is divided and sub-divided, other books will be used, but 
they are merely offshoots of the original forms. The neces- 
sary books are: The minute book to record the proceedings 
of the board meetings (there may also be various minute 
books for committees) ; the stock certificate book; stock reg- 
ister and transfer book; stock ledger; the general cash book 
or journal; the general ledger; daily statement book; certifi- 
cate of deposit register; cashier's check register; register of 
drafts issued; individual or dealers' ledgers; check and de- 
posit scratchers; discount and loan registers; maturity tick- 
lers; liability book; offering book; note tickler; collection 
register; teller's settlement books (teller's cash) ; dividend 
book and payroll, etc. 

The uses of these books will be apparent as the work pro- 
gresses, and description of either their form or purpose 
would be needless repetition here. 

The main books of record are: (a) The journal, which is 
a chronological record of the transactions which take place. 
When these transactions are assembled, sorted out as it were, 
each class by itself, we have (b) the ledger, which is an 
assembly of journal entries. The ledger may be a general 
ledger, an individual ledger, an investment ledger, a mort- 
gage ledger; but it is merely the assembly of journal entries 
in some form; which journal entries are transcripts of or the 
original entries, most likely transcripts of some other form 
of original entry, such as the deposit tickets, collection or 
discount tickets made at the time of the original transaction. 
And all the accounts come together in large banks and small 
in the (c) statement book. 

The General Journal 

The general journal is the aggregation of all the work 
of the bank for the day in bulk, as the other journal records 
are the aggregation of the individual transactions. It bal- 
ances the work of the whole bank, as the other books balance 
the work of a single department. From the various depart- 
ments, or from the various books of the bank, these items 
are assembled on the journal for proving purposes and also 
for the purpose of carrying to the general ledger. Thus, the 
receipts from depositors will be entered, either from the 
teller's window list, or from the receiving teller's depart- 



BANK ACCOUNTING 



259 



ment; payments from the paying teller. Discounts are 
taken from the discount clerk or discount register. Drafts 
issued, expenses paid, interest received, etc., are properly 
recorded, so that in the final test everything that has gone 
through the bank for the day will be entered. Of course, 



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GENERAL BALANCE JOURNAL 



each item could be so entered, and some savings banks do 
enter every deposit and every draft, every check drawn and 
each item of interest ; but it answers the same purpose to do 
so in bulk, making the original entry at the window or at 
the place of receipt. When the work of the day is over, 
each department reports to the journal clerk its receipts for 
the day and its payments, or the difference, and the work of 
the whole must balance as has the work of each branch. As 
soon as the journal balances the work for many of the em- 



260 THE PRACTICAL WORK OF A BANK 

ployees is over. The difference between the two sides of the 
journal is the cash balance on hand. 

From the journal the entries are posted to the general 
ledger. Where the work is voluminous a journal may be 
kept for each class of business, as, for instance, the "foreign 
journal" is the journal for out-of-town accounts. These in 
some banks are numerous and inasmuch as each correspond- 
ent has a debit and credit each day, these records necessi- 
tate much space and can best be kept separately, and the 
controlling figures passed through the general journal. 
There may be a debit and a credit journal, and still further 
divided into groups by alphabetical or geographical ar- 
rangement. 

The Equation of Accounting 

All accounting records are based upon the principle that 
there shall be an equilibrium; that the business is always in 
a state of balance. For every asset there must be a corre- 
sponding liability. If an asset is increased some liability 
must be increased. If an asset is reduced, some liability is 
reduced. If one asset or liability is increased another may 
be reduced. If cash goes out, a liability is reduced; if it 
comes in, assets are increased and liabilities likewise. There 
may be a shifting about, but unless the affairs are in bal- 
ance error has been made somewhere that must be corrected 
by another entry to effect the balance. And until the bank 
man learns the fundamentals involved in the brief statement 
of accounting principles above given, he cannot keep a set 
of books. 

The equation of all accounting is : Assets minus liabilities 
equals capital. 

You may state this in several ways and it always re- 
mains true. Assets minus capital equals liabilities. Liabilities 
plus capital equals assets. And the bank man must know 
this, or he will never keep his books in balance. And be- 
sides he must know what is an asset or asset value, and why, 
and what is a liability and why. When he pays the salaries, 
he carries the item for a time on the asset side because he has 
set up a nominal asset to take the place of the real asset 
(cash) which has gone out. And when he receives interest 
he makes it appear as a liability, because he has increased 
his assets and must have a liabilitv to offset. And thus there 



BANK ACCOUNTING 261 

is a constant offsetting of debits and credits, so that the 
statement is always in balance; and to keep it so is the art 
of bank accounting. 

The Statement of Condition 

The financial condition of all concerns is expressed in the 
statement of condition. In mercantile or trading concerns 
this is made periodically; but in banks it is made, as a rule, 
daily, reported to the authorities as called for and published 
as the law requires. This does not, however, always express 
the true condition, for the element of accrued earnings is not 
generally given in banks of discount, but is, as a rule, in sav- 
ings and investment institutions. Neither is accrued inter- 
est payable stated, but for general purposes the statement 
gives all the information usually desired, leaving it for peri- 
odical audits and examinations to determine the technically 
correct condition. 

The records of all banks agree in their essentials. There 
may be a few books of record under a single man, or there 
may be many under many men, but when these records come 
together in the statement, there is a unity of arrangement 
and classification. 

Purpose of the Statement 

The statement of condition has two purposes in mind: 
(a) To show the bank to be in a state of equilibrium, and 
that all assets and liabilities have been accounted for (ex- 
cept it may be a counterbalancing error, not likely to happen 
often; and (b) to guide the executive officers in their ad- 
ministration of the bank, and to inform the public and 
supervising officials of the condition. 

The form which accounts for all the various items, and 
which is in general use by all classes of banks is in the fol- 
lowing arrangement : 

assets. 

1. Loans and Discounts. 

2. Overdrafts. 

3. U. S. Bonds to Secure Circulation. 

4. U. S. Bonds to secure Deposits (par value). 

5. Other Bonds to secure U. S. Deposits. 
G. U. S. Bonds on hand (par value). 



262 THE PRACTICAL WORK OF A BANK 

7. Premium on bonds for Circulation; Premium on other U. S. Bonds. 

8. Bonds, Securities, etc., including Premium on same. 

9. Banking House; Furniture and Fixtures. 

10. Other Real Estate Owned. 

11. Due from National Banks (not approved Reserve Agents). 

12. Due from State and Private Banks and Bankers, Trust Companies, and 

Savings Banks. 

13. Due from approved Reserve Agents. 

14. Due from Federal Reserve Bank. 

15. Checks and other Cash Items. 

16. Exchanges for Clearing House. 

17. Notes of other National Banks. 

18. Fractional Paper Currency, Nickels, and Cents. 

19. Lawful Money Reserve in Bank, (a) Specie; viz.: Gold Coin, Gold Certifi- 

cates, Gold Certificates payable to order, Clearing House Certificates, 
Silver Dollars, Silver Certificates, Fractional Silver Coin, (b) Legal 
Tender Notes. 

20. Redemption Fund with U. S. Treasurer (not more than 5% on Circulation). 

21. Due from U. S. Treasurer. 

LIABILITIES. 

1. Capital Stock paid in. 

2. Surplus Fund. 

3. Undivided Profits (including sums, if any, set aside for special purposes, 

except reserve for taxes). 

4. Circulating notes secured by U. S. Bonds (less amount on hand and in 

Treasury for redemption or in transit.) 

5. State Bank Circulation outstanding. 

6. Due to National Banks (not approved Reserve Agents). 

7. Due to State and Private Banks and Bankers. 

8. Due to Trust Companies and Savings Banks. 

9. Due to approved Reserve Agents. 

10. Dividends unpaid. 

11. Individual Deposits subject to check. 

12. Savings Deposits. 

13. Demand Certificates of Deposit. 

14. Time Certificates of Deposit. 

15. Certified Checks. 

16. Cashiers' Checks outstanding. 

17. United States Deposits. 

18. Deposits of U. S. Disbursing Officers. 

19. Bonds Borrowed. 

20. Notes and Bills rediscounted. 

21. Bills payable, including Certificates of Deposit for money borrowed. 

22. Reserved for Taxes. 

23. Liabilities other than those stated. 

To understand the various items that go to make up a 
bank statement is to understand bank accounting, and each 
item, therefore, will be traced to its source to see what it 
represents. 

Assets 

1. Loans and Discounts. — This represents the amount 
the bank has loaned either on straight loans or by 
way of discounting paper of its customers. As loans are 
made and paid off, record is made in the discount depart- 



BANK ACCOUNTING 



263 



merit or on the loan journal, the total being carried to the 
general journal, thence to the general ledger, and from there 
to the statement book. 

National banks are required to report their loans by 
classes, as (a) "Demand Loans," one or two names; (b) 
"Demand Loans," secured by collateral; (c) "Time Loans," 
two or more names; (d) "Time Loans," single name; (e) 
"Time Loans," secured by collateral. The ledger account 
should correspond with this classification. 

2. Overdrafts. — This item is made up of amounts by 
which depositors have overdrawn their accounts, and is in 

OVERDRAFTS 

DATE 



NAME 


ADDRESS 


AvnrrvT ! AVERAGE 
AMOUNT j BALANCE 


REMARKS 

















BOOKKEEPER S REPORT OF OVERDRAFTS 



the nature of loans without interest or security ; and since the 
bank has paid value for them, they must appear as an asset, 
to measure the indebtedness of the depositors to the bank as 
contra distinguished from the debt due the depositors were 
the balance due to and not due from the depositors. To 
effect the balance, the individual deposits are increased by 
the same amount, the difference being the net deposits. This 
item is not carried on the general ledger, as a rule, the fig- 
ures being obtained from the ledger bookkeepers who make 
notations of overdrafts, and report to the general ledger 
bookkeeper, who also keeps a record of these amounts. If 
the net deposits only were shown as a liability, the amount 
due to the bank from depositors who have overdrawn would 
not appear as a resource, which it properly represents. 1 



iBy a recent ruling by the Comptroller of the Currency overdrafts in 
national banks are now forbidden. 



264 THE PRACTICAL WORK OF A BANK 

3. U. S. Bonds to Secure Circulation. 

4. U. S. Bonds to Secure Deposits. 

5. Other Bonds to Secure U. S. Deposits. 

6. U. S. Bonds on Hand. 

National banks upon their organization are required to 
invest a certain portion of their capital in United States 
bonds, 2 against which they may issue their notes. That is, 
upon purchasing bonds and depositing them with the Treas- 
ury Department, circulating notes are issued to the bank in 
the par amount. The bank, therefore, draws interest on the 
bonds and when the notes are paid out in the form of loans, 
the bank receives interest on the loan also, thus making ad- 
ditional profit. Thus, if the bank draws interest on the loan 
at six per cent., and two per cent, on the bonds, it is getting 
eight per cent, on the money; but the cost attending the 
issue of bank notes reduces the profit on the bonds to about 
one and a half per cent., and many banks do not take out 
more circulation than the law requires, while others take out 
large amounts. 

Before a bank may obtain a deposit of Government 
funds, it must lodge with the Treasury Department security 
in the form of bonds, either United States or other bonds, 
and items four and five represent these bonds which belong 
to the bank, but are held in Washington for its account. 
United States bonds on hand merely means bonds which the 
bank owns and has in its vaults and unpledged either for de- 
posits or for currency purposes. 

7. Premium on Bonds for Circulation; Premium on 
Other U. S. Bonds. — This represents the premium paid on 
bonds, the securities being carried at par. The premium is 
really part of the cost of the bonds, and a part of the mar- 
ket value. But it is the rule in many banks to carry securi- 
ties (especially "Governments") at par and the premium 
separately. This is charged off from time to time as condi- 
tions warrant. 

8. Bonds j Securities, etc., Including Premium on the 
Same. — This represents other bonds and stocks held by the 
bank, and includes the premium, which makes the amount of 
par and premium their cost, which should be scaled by the 
process of amortization so that the bonds stand on the books 

2 Repealed by the Federal Reserve Act. 



BANK ACCOUNTING 265 

at their present investment value as determined by amortiza- 
tion, the deductions on premium bonds and additions to dis- 
count bonds being made from time to time so that the pres- 
ent investment value is shown. Especially is this true of 
bonds for permanent investment. 3 

9. Banking House, Furniture and Fixtures. — This rep- 
resents the real estate occupied by the bank as its banking 
house, the cost of the furniture and fixtures, vaults, etc., 
which should be properly scaled down from profits, until the 
furniture is entirely eliminated, or if held at all, only at 
second-hand prices, and the real estate at its fair market 
value. 

10. Other Real Estate Owned. — Banks are not, as a 
rule, permitted to hold real estate, except for banking pur- 
poses, unless the same be taken for debts due the bank. They 
cannot acquire it as an investment, and consent of authorities 
is necessary to hold for a period of time. Real estate is not 
a good banking asset, and the reason why so many private 
banks and bankers have come to grief is the fact that they 
have invested in real estate, first and second mortgages, and 
tied up deposits payable on demand in a long-time and un- 
liquid security. Real estate is a precarious investment and 
is well tabooed in banking circles. 

11. Due from National Banks not Reserve Agents. — 
This represents, in national banking circles, the amount due 
from banks that are not reserve agents, on deposit account, 
items charged to other banks and in process of collection, 
and overdrafts of banks (not included in overdrafts of cus- 
tomers) ; balances due from other banks against which 
drafts are sold. 

12. Due from State Banks, Bankers, etc. — These are 
balances of the same nature as the above, due from State 
banks, bankers and trust companies, against which the de- 
positing bank draws its drafts, and to which it sends its 
collection items. 

13. Due from Approved Reserve Agents. — Before a 
bank can act as a reserve agent for another as the law re- 
quires, or at least allows, consent must be obtained from the 
governing authority,- unless the law makes the provision gen- 

3For full discussion of this principle see chapter on "Bond Accounting in 
Theory and Practice" in the Savings Bank and its Practical Work, by the author. 



266 THE PRACTICAL WORK OF A BANK 

eral. In national banks the consent of the Comptroller of 
the Currency is necessary, and in order to determine the 
amount of these balances with approved agents, and, there- 
fore, allowable in the reserve account, they are reported sep- 
arately. They are not numerous, for reserve cities are few. 
14. Due from Federal Reserve Bank represents the 
reserve carried with the Federal Reserve Bank of the dis- 
trict, and is of the same nature as No. 13. 

15. Checks and Other Cash Items. — This includes all 
checks and other items which must be collected by messenger, 
or which for some reason or other cannot be sent out for 
payment or charged to some account, but must be held in 
the cash. They should never be items for money advanced, 
"I. O. U.'s" or anything of the sort. The cash should be 
"clean." 

16. Exchanges for the Clearing -House. — This is the 
amount of the checks and other items that will be sent to the 
clearing-house the next morning, and for which payment 
will be made the next day. 

17. Notes of Other National Banks. — These are nation- 
al bank notes separated from the notes of the issuing bank 
and reported independently. In national banks they cannot 
count as reserve, but may in State institutions. 

18. Fractional Paper Currency, Nickels and Cents. — 
The fractional paper currency is a relic of the Civil War, 
and a few of these old notes for less than one dollar are still 
in circulation, or held by banks as souvenirs. They are an 
obligation of the Government and are still good. One bank 
has carried seventy-five cents' worth of these on its daily 
statement for nearly thirty years. 

19. Lawful Money Reserve. — This is the lawful reserve 
of the bank, and includes : Gold and silver coin, gold certifi- 
cates, gold certificates payable to order, clearing-house cer- 
tificates, silver dollars, silver certificates, fractional silver 
coin, legal tender notes (greenbacks), and Federal Reserve 
Notes. 

20. Redemption Fund with the U. S. Treasurer. (Not 
More than Five Per Cent, of the Circulation). — National 
banks are required to keep on deposit with the Treasurer at 
Washington a fund of five per cent, of the circulation to re- 
deem the notes as presented through the Treasury Depart- 
ment. The Treasurer credits notes received against this 



BANK ACCOUNTING 267 

fund, and charges notes issued, and this fund is part of its 
reserve. Upon advice from Washington that a certain 
amount of notes have been redeemed, or retired, the bank's 
circulation account is charged and the redemption fund is 
credited. The fund must be kept at five per cent. 4 

21. Due from the U. S. Treasurer. — This is a transit 
account for currency which may be mutilated or good, sent 
to Washington for redemption. When currency is sent out 
it is charged to this account and when returned the account 
is credited with the amount. 

In the accounts with banks, as listed above, the following 
remarks are opportune: 

Remittances of cash items are charged as of the date 
when sent out and appear in the balance although en route. 
Collection items are charged only on receipt of advice. When 
currency is shipped it is charged to the bank upon memo, 
from the paying teller. Drafts on banks are credited in 
total from the draft records. 

Where no account is kept with a bank and the item is 
sent out as cash, it is charged to a "transit account" or some 
similar name, to indicate items out in the process of collec- 
tion, and not sent to regular correspondents. 

Liabilities 

The liabilities of a bank are of three classes: (a) Liabil- 
ity to the owners or stockholders; (b) liability to the depos- 
itors and to other banks; (c) liability on its notes. 

1. Capital Stock. — This measures the proprietary inter- 
est of the owners. The amount is regulated by law and the 
bank in its organization must have the required capital paid 
in in cash. The record of these payments is made in the 
capital stock account, and the evidence of the interest of the 
stockholders is the stock book, which has a record of all stock 
issued and cancelled. Stock is issued in shares, and there 
should always be the authorized number of shares out- 
standing. 

The stockholders are the owners, entitled to the profits 
and liable for the losses, and capital is always a liability. It 
is the debt which the corporation as a corporation owes the 
stockholders. They cannot, of course, collect this debt. 

4The Federal Reserve Act repeals the reserve effect of this fund. 



268 THE PRACTICAL WORK OF A BANK 

There is no process by which a stockholder can compel the 
corporation to give him back his investment. He can only 
surrender his ownership by transferring his shares to 
another, and the stock records show such transfers. 

2. Surplus. — This may consist of amounts originally 
contributed by the stockholders in addition to their stock. It 
is additional protection to the depositors. When a bank is 
started, it frequently happens that the stock will be offered 
at, say, $125 per share. The $100 is carried to capital ac- 
count and the $25 to surplus fund. The stockholder thus 
contributes a bonus of $25, hoping the bank will become so 
prosperous that the stock will, as an investment, be worth 
$125 or more on the market. 

The surplus also includes the profits of the bank which 
have not been paid out in dividends. As a rule banks are 
required to set aside from earnings a certain portion before 
dividends are declared, this going to the surplus fund until 
it reaches a certain percentage of the capital. The surplus 
affords additional working capital on which no dividends 
are paid, and is one of the highly protective features of 
banking and all banks strive to accumulate a surplus of con- 
siderable magnitude. It is an evidence of good management. 
The surplus fund is more or less stationary, additions being 
made from time to time out of undivided profits. 

Some banks have large capital and large surplus funds; 
others have small capital and large surplus funds, the most 
notable being the Chemical National Bank of New York, 
which until 1907 had capital of $300,000 and an enormous 
surplus, and for that reason its stock was selling at about 
$4,400 ; but the capital has since been increased by stock div- 
idends to $3,000,000 so that the present capital is $3,000,000 
and surplus $5,000,000 — making a very strong institution. 

It stands to reason that a bank whose capital and sur- 
plus is, say, a million dollars, and whose debts (deposits) 
are five millions, is stronger than the bank which has but 
half as much capital and surplus and the same liability; for 
in the former case, the bank must lose a million before its 
depositors would be injured, while in the other case a loss 
of half as much would affect the depositors. The pride of 
banking is to have a large capital, ample surplus, and to 
build up the latter out of earnings, thereby increasing the 



BANK ACCOUNTING 269 

value of the shares as well as offering added protection to 
depositors. 

3. Undivided Profits. — The undivided profits represent 
the bank's undistributed earnings. The profits arise from 
the loans and investments, interest paid on balances in other 
banks, and exchange charges received for drawing drafts, or 
collected from its customers. The following are the charges 
against the earnings : Overhead expenses, such as rent, light, 
taxes, salaries, together with stationery, interest paid on de- 
posits, exchange paid for collecting checks, losses. The bal- 
ance is the undivided profits, from which additions are made 
to surplus. The undivided profits' account is the profit and 
loss account of the bank, to which are carried the earnings 
and against which are charged the expenses and the result 
is the net profits. 

4. Circulating Notes Issued, Secured by Bonds. — As 
was said under the resource item corresponding to this, be- 
fore notes can be issued bonds have to be purchased and 
lodged with the Treasurer at Washington. After the cur- 
rency notes have been issued by the Comptroller of the Cur- 
rency they are sent to the bank and signed by the proper 
officers and placed in the till for paying out. They are, h'ke 
the deposits, a liability of the bank. 5 Notes on hand, in 
Washington for redemption, or in transit must be deducted 
and only net amount outstanding shown. 

5. State Bank Circulation. — This no longer obtains, 
there being a tax of ten per cent, on State bank issues and 
none are now in circulation. 

6. Due to National Banks not Reserve Agents. — This 
is the amount due other national banks on open account, 
items received for collection as cash, and for which credit 
has been given. 

7. 8, 9. Due State, Private, Savings Banks, Trust 
Companies, and Approved Reserve Agents. — These are 
the balances due other banks, against which drafts are 
drawn by them and on which interest is, as a rule, paid. 
Amounts due savings banks and trust companies are report- 
ed separately to the Comptroller. Overdrafts of banks are 
not regarded as overdrafts, but amounts due to or from 
banks; hence the Hability must include the overdrafts of the 

BSee under bank notes, chapter Q. 



270 



THE PRACTICAL WORK OF A BANK 



bank, and the asset side show the amount included in the 
amounts due from banks. 

9. Due to Approved Reserve Agents. — This has al- 
ready been sufficiently explained. It is segregated in order 
to determine the net liability of the reserve agents' account. 

10. Dividends Unpaid.— When a dividend is declared 
it is charged to the undivided profits and credited to divi- 
dend account. Checks are mailed to stockholders, and as 
presented are charged to the dividend account. The balance 
is represented in this item. Dividends are frequently un- 
paid for years. 

11. Individual Deposits Subject to Chech. — This is the 




month*. N» iittcrMt «ft*r u'x months. 






^tzdAuv 



CERTIFICATE OF DEPOSIT 



principal item of a bank's liability. It may arise from de- 
posits of cash or checks, or from the proceeds of loans which 
are credited to the checking accounts; but it is the chief lia- 
bility of the bank and all but the time deposits are payable 
on demand. 

The custom is to show only the net individual deposits on 
the general ledger. This is the deposits less overdrafts. The 
overdrafts are, as before stated, really a loan without secu- 
rity. The statement shows the gross liabilities, and contra 
on the asset side the overdrafts which effect the balance. In 
a pamphlet on bank accounting issued by the American In- 
stitute of Banking, it is stated in this regard: 

"It is not possible for the general ledger bookkeeper 
having before him the daily statement of the previous day 
and the total debits and credits of the current date to deter- 



BANK ACCOUNTING 271 

mine the amount of the overdrafts and the individual de- 
posits. He can, however, determine the deposits less over- 
drafts and this he does in the general ledger. Later, when 
he receives from the individual bookkeeper a memorandum 
of the amounts of the overdrafts, he enters that amount in 
the daily statement and increases his ledger balance in the 
deposit account by that amount for the daily statement." 

12. Savings Deposits. — These are the deposits received 
in the savings department, subject to withdrawal, generally 
upon notice, and represented by pass-books. The totals 
are received from the savings tellers and carried to the gen- 
eral ledgers as in the case of individual deposits. There are 
no overdrafts. 

13, 14. Certificates of Deposit. — These are of two 
classes: (a) Demand and (b) Time. These certificates are 
in the nature of savings deposits, left with the bank on in- 
terest and for which a receipt in the form of a "Certificate 
of Deposit" is issued, which promises to pay the amount 
upon demand or at a stated time. 

15. Certified Checks. — These are the checks which the 
bank has certified and become liable for payment. They 
are, when certified, charged to the drawer's account and 
carried to the certified check account, and the balance due on 
these items here appears. The checks when paid are charged 
to the account and the amounts reported to the general 
ledger bookkeeper for his records. 

16. Cashier s Checks Outstanding. — A cashier's check 
is an order drawn by the bank on itself. They are issued 
for paying the bank's expenses, and other expenditures, and 
are often issued for local purposes in lieu of a New York 
draft, and are sometimes exchanged for the customer's check 
in preference to making a certification. In some places this 
is quite common. A cashier's check account is kept in de- 
tail and the amounts issued and paid are reported to the 
general ledger bookkeeper for making his statement. 

17. 18. United States Deposits, etc. — These are de- 
posits of the United States from funds in the Treasury, or 
from customs duties, taxes, etc., or any other source, and 
for which the bank has lodged bonds as security, as men- 
tioned on the resource side of the statement. Postal sav- 
ings deposits are in this class and are usually reported 
separately. 

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272 



BANK ACCOUNTING 273 

19. Bonds Borrowed. — It sometimes happens that a 
national bank will borrow bonds to secure its circulating 
notes rather than buy them. A fee is paid to the owner for 
their use and security given. These bonds are reported sep- 
arately, since they are not the property of the bank. The 
bonds appear on the other side of the statement among the 
bonds deposited with the Treasurer, and the liability is here 
shown. 

20, 21. Rediscounts and Bills Payable. — It frequently 
happens that a bank will have call for more money than it 
has to spare. It cannot credit a loan on deposit account, for 
by so doing it would reduce its reserve below the required 
amount. It cannot pay out the cash, for this effects the 
same result. It, therefore, must turn into money some of 
its securities, either by: (1) Calling upon borrowers whose 
loans are due to pay. This will bring in cash, or reduce its 
liabilities by reducing deposits; (2) selling securities, and 
it may be take a loss; (3) selling outright some of its loans, 
and so anticipate their payment. It has no further liability 
if it sells "without recourse"; (4) rediscounting some of its 
notes and bills. This is the European custom. If it retains 
any liability for their payment, it must carry the amount as 
a contingent liability. This it does by the item of "redis- 
counts." Of course if they are actually sold without liabil- 
ity, no further record appears. An asset has gone out and 
in its place has come another; i. e., loans and discounts have 
been reduced and cash increased, or the amount due from 
banks added to, or in some other form the balance has been 
maintained, and it has available funds for loan purposes. It 
may sell or rediscount outside paper for loaning in the home 
market. Frequently banks rediscount with their city corre- 
spondents, and under the Federal Reserve System the redis- 
count of notes and commercial paper will be one of the chief 
avenues for aid in times when banks need funds and the 
greatest value of the Federal Banks to the financial opera- 
tions of the country will come through the privilege member 
banks will have of turning their good assets into cash by 
this means ; ( 5 ) by borrowing on its own note and this forms 
a liability reported under bills payable. 

22. Reserved for Taxes. — In all accounting processes 
it is a rule that accruing obligations shall be allowed for, 
preferably by setting aside an amount to cover the charge. 



274 THE PRACTICAL WORK OF A BANK 

Taxes and other yearly charges accrue constantly. It is not 
fair to say that suddenly on a certain date the amount be- 
came due ; for part was due each day. Just the exact amount 
cannot be determined until the tax is levied; but in cases 
such as rent, if paid yearly, the exact amount is known, and 
can be determined as a liability at any time; therefore, all 
well-managed concerns make such allowances, and banks 
create a book liability by setting up an account called "Re- 
served for Taxes" which is carried and added to from timfc 
to time, until the amount is paid, when the liability disap- 
pears. The amount can be fairly determined from past 
payments. 

23. Other Liabilities.— -These are for other liabilities 
not stated or covered in the foregoing, and might include 
salaries, pensions, interest on deposits unpaid, etc. 

We have thus gone through a statement to determine 
what each item means, where it came from and what its 
place is in the accounting scheme. 

The Bookkeeping Force 

The individual who is responsible for the bookkeeping 
of the bank may be termed by various names, such as head 
bookkeeper, auditor, chief clerk, comptroller, assistant 
cashier, etc., but his duties are in the main the same — to keep 
the bookkeeping machinery working smoothly. He must 
keep the statement in balance. He must handle the men. 

The head of the accounting force comes into closer con- 
tact with the rank and file of the force than any other man 
in the bank. He is immediately responsible for what they 
do, and is the "general" who uses the forces supplied him 
to produce certain results. It is, therefore, proper at this 
point to discuss the force ; how it is recruited ; how governed, 
before taking up what it does in a mechanical way. 

Most banks work from the bottom up, to a large extent, 
and train their own men. Boys are taken in as messengers 
at from fourteen to eighteen years of age, and as they be- 
come familiar with their surroundings are advanced as va- 
cancies occur, if in the opinion of their superiors such ad- 
vancement is warranted, i 



BANK ACCOUNTING 275 

The Application 

• 

The application for employment is usually in writing, 
both to test the handwriting of the applicant and to ascer- 
tain his general qualifications. Some banks prefer a letter 
of application to a formal document, to test the resourceful- 
ness of the applicant and the way he goes at things. If the 
applicant is favorably considered he may then file a formal 
application as a matter of record. 

After this application has been received in formal shape, 
it becomes necessary to check the statements made therein, 
and this is done by communicating with the references given. 
This may be done by a letter of inquiry, or by a printed 
form asking certain questions. 

It is opportune to say here that it is sometimes unfair 
to the applicant to judge too much by what may have hap- 
pened in another place of employment, without knowing 
both sides of the story. Of course, if a man were discharged 
for indulgence in liquor, this is an obvious fault; but if it 
were a matter of temper or temperament, he might under 
more favorable conditions make an exceedingly valuable 
employee. Some of the lamentable failures in banking are 
due to wrong environment. And not knowing what that 
environment was, we cannct pass judgment, or at least 
should not unjustly. Some banks prefer to take men out of 
employment; for if they do not fit, they are no worse off; 
but to take a good man out of a position which he already 
fills to satisfaction is risky, especially for him. 

Available Men 

Inasmuch as most banks have occasions when they may 
need men at short notice they should have a file of applica- 
tions, giving the general qualifications of men and boys, so 
that when the need comes there will be available candidates. 
It is important that the bank have the experiences of those 
advanced in life as a guide to what they have done, as well 
as an indication as to what they claim to be able to do. Boys 
should be investigated particularly as to their home life, for 
this is the essential element. A boy who has a good mother 
is a safe risk. The boy who keeps questionable company, is 
out late nights, and has no restraining influences, is a 
doubtful risk. 



276 THE PRACTICAL WORK OF A BANK 



IRVING NATIONAL BANK 

New York, .__ «_*. , 191 

APPUCATION FOR EMPLOYMENT 



Full name of applicant. ...... i Age. 

Residence , 

Are you single, married or a widower? 

Do you live with your parents?. 

Do you own or rent the house in which you live, or do you hoard? 



Have you a family? If so, number of children, and number of persons in all dependent on you for support? 



Are you at present employed or unemployed? . . . , 

If unemployed, how long have you been out of employment? 

By whom were you last employed? 

Their address? 

How long were you in their employ?. Salary?, 

Why did you leave? — ; 



Plonto Bll in the follow ioj blanks, giving dates of your employment, and names of employers prior to abore. 




FROM 
WHAT OATC 


WHAT 0»Tt 


CMPLOVCD AS 


AT (ADDRESS) 


IN SERVICE OF 
(NAME Of CHPLOrCD OB CORPORATION) 


REASON FO ; R LEAVING 





























































































What are your habits in regard to liquors and tobacco?. 
Other References: 



It is understood that any employment is to be by the month and from month to month only. 
(Signature) • 



APPLICATION FOR EMPLOYMENT 



BANK ACCOUNTING 277 

Some banks make it a rule to obtain help by advertising 
in the newspapers, filing application with the Y. M. C. A. 
and other high-grade agencies, never, of course, giving the 
name of the bank. This is often done to prevent directors 
from favoring their friends. From the answers to these ad- 
vertisements applicants are interviewed and selections made. 

The knack of choosing men is an art acquired by few. 
The ability to get men who can do things better than your- 
self is a fine science, especially if in the doing they reflect 
credit upon themselves and you — and you do not become 
jealous. First impressions count. And while it is not fair 
to judge a man — or a boy — imder severe nervous strain, the 
impression is important. The author once had the pleasure 
of attending a meeting of an organization committee of a 
new bank, where applicants for an executive position were 
to be interviewed. Man after man was ushered in, and 
cross-examined, rather too pointedly for the applicant's com- 
fort; but when the right man came along, the committee 
quickly agreed that he was their man. 

The New Recruit 

When the new recruit arrives he should be shown around 
the bank, made acquainted with the men, where they are, 
their names, and his general duties. He should be told cer- 
tain things and not be left to find them out for himself. He 
should have the rules of the bank explained to him, and be 
placed in charge of the one next higher up for coaching. In 
New York there is a little book which gives the clearing- 
house numbers, location of banks, etc., all of which he will 
speedily learn as he begins his work. Clerks who handle 
money or valuables of any sort, in fact, all bank men are, 
as a rule, bonded. Personal bonds are now quite rare, the 
usual surety bond being common, easy to get and affording 
no embarrassment to anyone. The fee is usually paid by the 
bank, as it should be. 

One of the requisites of a bank clerk is that he be a good 
adder, and the beginner cannot do better than to take a 
few lessons in adding. Let him, as he gets an odd moment, 
make a few slips of figures on the adding machine, and add 
them up, turning the footings under until he has finished. 
The machine will correct his mistakes. Let the list be made 



278 



THE PRACTICAL WORK OF A BANK 



longer and longer, until it assumes considerable length, and 
he will soon learn the fine art of addition. Let him also prac- 
tice on the adding machine and typewriter as occasion war- 
rants, until he can operate both with ease. Some clerks by 
reason of the mechanical adders have become so accustomed 




7 S- 3 ^ 



531 
3,» .8 1 

S.9 8 511 

3.0 43 1" 

3.0 6 32 



THE ADDING MACHINE AND ITS WORK 

(Courtesy of the Adder Machine Co., Wilkesbarre, Fa.) 



to machine additions that after being in a bank two or three 
years are still unable to add correctly a half-dozen amounts. 
I have seen a clerk leave his desk and take as much time in 
walking to a machine as would be required to foot the few 
amounts he may have on a little piece of paper. Again, I 
have seen a bookkeeper who lacked confidence in his own 
mathematics, with a ledger propped up on two or three 
stools, footing his pages, with the aid of an adding ma- 



BANK ACCOUNTING 279 

chine. And the chances are that when he copies the foot- 
ings he will get them on the wrong pages. Of course, it is 
against the rules, but I suppose the poor fellow's brain is 
so fagged with its unaccustomed task that he feels he must 
call in some mechanical aid. I have heard that in some 
banks a rule is in force that no clerk shall foot less than a 
certain number of items on a machine. But I don't know 
who watches them and counts the items. The department 
heads must have little time for anything else. 6 Arithmetic, 
especially interest computations, may well be studied. 

Many large institutions keep a record of all employees, 
when they begin work, salary, time of arrival at and de- 
parture from the bank, vacations, sickness, etc., as a check 
upon the man himself as well as a part of the machinery 
of the bank. Some check by time clock, others by a record 
kept at the door, 7 and signed by the employee, and some 
banks keep a record of errors made. 

The Chief Clerk 

The executive head of the accounting force is the chief 
clerk, or some other official, who does the same work under 
another title, sometimes assistant cashier, who is charged 
with the duty of keeping the machinery working smoothly. 
He endeavors to get the best results with the least expendi- 
ture of the bank's time and money, remembering that cheap- 
ness is not always conducive to economy in the long run. 
He controls the records of the bank. He not only sees that 
they are properly kept but properly stored and made avail- 
able for reference. Sometimes the hiring of the force is 
left to the chief clerk, although applicants may be inter- 
viewed by men higher up. 

A good man quickly distinguishes himself. He stands 
out by the quality of his work. It is so in school; it is so 
in life and in business — we can pick the winners. Bank 
clerks are but men, and it is a fine art to select the apt and 
the quick from the plodders; the ambitious from the satis- 
fied, the slothful, the indolent. The thing to do is to get the 
force, which may be a mixture of all, working together 

6N. D. Ailing before New York Chapter, A, I. B. 

TThere is a time-keeper in New York, who knows at sight each of the five 
hundred employees, and keeps a record of their coming and going. 



280 THE PRACTICAL WORK OF A BANK 

smoothly; prevent jealousies; deal out justice; pay fairly; 
promote wisely; and in all things remember that the Golden 
Rule has its place in banking. 

The chief clerk will be on the lookout for improved sys- 
tems, short and better methods, aiming to keep the expenses 
of the bank down by using mechanical appliances wherever 
possible — doing with a rubber stamp or the printing press 
many things that have heretofore been done by hand. 

Rubber Stamps 

It is amazing and amusing to discover how short-sighted 
many in authority are. In a certain department store send- 
ing out thousands of bills monthly, the management never 
thought so far as to have the date printed on enough forms 
for a month's use; for to write the date and the words "To 
bill rendered," five thousand times must have taken at least 
one day's time of the clerks who made out the statements. 
It is in the little things that time and energy are saved. 
The motto should be: "Never do by hand that which can be 
done better by machine; and never attempt to do by ma- 
chine that which requires a head." 

It is well to distribute the work so that there will be an 
even grind and not spasmodic rushes. Men do good work 
under pressure, but they should not be rushed. It is better 
to have an even pace than a lull and a rush, a rush and a 
lull, for the tension is relaxed and it is difficult to speed up. 
In one large bank there are two busy periods, July and 
January, with only a moderate amount of work in between, 
because the management could not devise a scheme to dis- 
tribute the work more evenly. For six weeks in the year 
the clerks are literally worked to death; while in the other 
forty-six they are just comfortably busy. 

In large banks a force, sometimes known as "floaters" 
or "the flying squadron," is kept available to be pressed into 
service in various departments at different times in the day, 
in order to have a large force where the volume of work re- 
quires. Where the work is heaviest the reserves are placed 
to strengthen the regular employees of the department. 

A savings bank in Brooklyn makes it the rule to keep 
its men busy; not too busy, but occupied all the time. If a 
clerk remains after the others have finished, the cause is 



BANK ACCOUNTING 



281 



inquired into and if he is overworked, the burden is dis- 
tributed. If he is slow he is coached; if he is lazy his health 
is inquired into, and if he is unfit they get him another job. 
If work must be done on a holiday the clerks may come, 
though not compelled to, and get a generous fee for sacri- 
ficing the holiday — but the whole force shows up. But this 
institution is one of the few conducted on a broad plane of 
humanity, with an exceedingly fine esprit de corps. 

The Art of Handling Men 

It is a fine art — this art of handling men; of winning 
their confidence. When your force works because they like 
you, and not because they are afraid of you; when they do 
as good work while the schoolmaster is out as when he is in; 
when they give up a holiday willingly because they see the 



CREDIT CLERK-PROOF SHEET 

For 191 



Account 



Loan Department 
Collection Department 
Coupon Department 
Paying Teller 
Receiving Teller 
Trust Department 
Reorganization Department 
Securities Department 
Foreign Department 
Transfer Department 
Mail Teller 

Total Departmental Balances 

Banks and Bankers Ledger 

A— B 

C-E 

G-H-I 

F-J-K-L 

M— O 

P-R 

S 

T— Z « 

Suspended Balances 



PROOF SHEET — CREDIT CLERK 



282 THE PRACTICAL WORK OF A BANK 

need, and do it for your sake — then you have won your men, 
and you will have no trouble with anarchy in the ranks or 
ink spots on the ledger. 

In a large bank it seemed needful at one time that the 
force be corrected for a few things that were occurring that 
did not make for discipline. The officer — nearly as young 
as the youngest — called them together and said a few kind 
words, which they understood — and obeyed willingly, be- 
cause they understood and saw the logic of it all; and as 
they went back to work, one by one they thanked him for 
what he had said, but most of all, the way in which he had 
said it. You need not knock a man down to make him see 
the point — it may be he will see it easier if you lift him up! 

A certain other bank worked on the principle that to do 
anything for the men would show that the administration 
was kind — which wasn't so. When a rebuke was necessary, 
it was given in such a way as to leave a sting. When ac- 
tual correction was needful it was not correction, but abuse. 
The county fair was a yearly occurrence. It was the big 
event of the year. The bank work was brisk in the morn- 
ing and slack in the afternoon; yet for ten years not a clerk 
in the bank had seen the fair. The manager didn't 
think it necessary that they should. He didn't care about 
it, why should they? But when a new officer took hold and 
suggested that by dividing the work property all could have 
an afternoon — but himself — it was found that no one was 
injured, all were pleased, and nothing happened. It was 
merely a bit of thoughtfulness. 

It is needless to say that errors should not be covered 
up. Some banks will not allow an ink eraser in the place, 
requiring all errors to be initialed and crossed out, while 
others are more liberal ; but it must be understood that errors 
must be reported, and if the rebuke is kind, but firm, it 
will have its effect. Be frank with your men; ask them to 
be frank with you, but above all things remember that to be 
kind costs no more than to be ugly and you lose more than 
they by ill treatment. 

It may be necessary in some banks to place the men 
under a time-clock or similar check as to their going and 
coming ; but if the force is not too large it will do as well to 



BANK ACCOUNTING 283 

put the men on their honor. All men have that, or it can be 
developed, and it is better to work on this than to place too 
many checks on the moral side of their work. 

Days Off 

Some men will take advantage of a bank's goodness in 
allowing days off, and while a day off is not to be despised, 
it can be overdone. Some savings banks give each man a 
day's vacation a month, so that there is no excuse for ask- 
ing for any additional time unless necessary. Other banks 
never allow any days off except the regular vacations. A 
book might be kept or a card record, showing the days off, 
and the reason. Vacations should be insisted upon, both as 
a matter of good health and as affording an opportunity to 
check the work, particularly if it is handling money. It 
gives the other men a chance to learn the work, and is a de- 
sirable thing all 'round, except in those banks where the 
force is so small and overworked that it means temporary 
help, which is always more or less unsatisfactory, or over- 
burdening those who remain behind. Some banks have for- 
mal blanks for leave of absence, and these when filed may 
be used as the basis of the records of the employees. There 
must be a system in a large bank if all these minute details 
are to be properly recorded. 

Pensions for Employees 

Some banks operate a pension system for their em- 
ployees. A small percentage of their wages is withheld 
each month, going to the credit of a fund in the name of the 
employee, and when the employee leaves the service of the 
bank before the age of retirement for any cause other than 
disability occasioned by illness, the amourit which has been 
contributed by him to the fund is returned. 

Semi-annually the bank contributes to the fund an 
amount equal to or in excess of the aggregate of the con- 
tributions by all of the employees, and from this fund, made 
up of voluntary contributions from both bank and em- 
ployees, a percentage of his average wage during his time 
of service is paid from the time of his retirement semi- 
monthly during life. 



284 THE PRACTICAL WORK OF A BANK 

Purpose of the Records 

The bookkeeping records of the bank culminate and find 
expression in the statement of condition, which has already 
been analyzed. The "Statement of Condition" must be dis- 
tinguished from the "general ledger statement" which it re- 
sembles, and from which it is made. The distinction lies in 
the fact that in the statement of condition the nominal ac- 
counts, such as expense, interest, rents, etc., are omitted, 
and only the real assets and liabilities are shown. The 
statement of condition goes to the Comptroller of the Cur- 
rency and to State supervising officials and is published in 
the newspapers in condensed form; while the statement 
taken from the general ledger daily is used for the guidance 
of the bank's officers, as well as to test the balancing of the 
books. The purpose of the records is, to repeat what has 
been said at the beginning of the chapter: (1) To keep a 
chronological record of the increase or decrease of the assets 
of the bank; from whom value is received and to whom 
value is due; (2) the profit or loss that attends the opera- 
tion of the bank; and (3) the financial status. If we had 
no record of the daily events, we would not be able to know 
the state of or the avenues of the indebtedness as it exists; 
and if we had no record of the property which came in or 
the property which went out of the bank, we could not know 
the financial position or status at a given time. We could 
not keep the equilibrium. 

The purpose of the accounting records is, therefore, to 
keep this balance, and for every debit there must be a credit 
somewhere. If the depositor's account is increased, as ex- 
pressing the increased liability of the bank, there must be 
an asset to correspond. The reason we have an "over" or a 
"short" is, the equilibrium has been disturbed. The teller 
has, for instance, increased the liability of the bank, say 
$100, by receipting for the $100 in the depositor's pass- 
book, and, therefore, set up a liability to the depositor in 
that sum. He has, however, on the other side but $90 as an 
asset in cash, or a check for collection, or some other item, 
and the equilibrium is out of true, and there is a "shortage." 
He can only right the balance by a journal entry, which sets 
up a nominal account in place of the missing asset. There- 
fore, he makes a charge to "Overs and Shorts" in the sum 



BANK ACCOUNTING 285 

of $10, which takes the place of the $10 in the cash. He 
might charge the depositor the $10 and thus reduce the lia- 
bility of the bank; but he cannot do this without warrant, 
and so must proceed on the first mentioned plan. With 
this brief statement of the fundamentals of accounting, 
which every bookkeeper must do, if not understand, we are 
prepared to spend a little time in the bookkeeping depart- 
ment to see how these records are kept; not going into de- 
tail too closely, but working on general principles, for in 
the last analysis they are all alike in principle but differ in 
detail. There must be an account with every asset, real and 
nominal, and with every liability, all coming together in the 
general ledger, and finally in the statement. 

The General Ledger 

The general ledger, following the accounting principle 
that a ledger is but a summation of the other records, which 
it controls, holding the totals, while the other records con- 
tain the details, must have an account for every class of 
property, every class of instrument, and every nominal ac- 
count that is needed to record the work of the bank. As 
new elements arise, new accounts are opened. If the bank 
had no banking-house of its own, there would be no ''bank- 
ing-house" account. If it received no rents, there would be 
no "rent" account; but as soon as it bought a site for a 
banking-house, there would be raised a real estate account 
to record the purchase. If it rented part of the building, it 
would set up a rent account, and so on, the ledger build- 
ing itself to conform to the changing status of the bank. 
This record is preferably kept in loose leaf form, unless the 
bank officials are biased against this method, when it would 
be a bound volume. It lasts considerably longer than other 
books of record, and may be properly bound, but the loose 
leaf book has so many advantages, such as dividing the book 
into sections, large or small as needs require, etc., that the 
loose leaf form is highly efficient as a book for the general 
records. 

Controlling Accounts 

It would be possible, of course, to keep all accounts di- 
rectly in the general ledger, even those with depositors, but 



286 THE PRACTICAL WORK OF A BANK 

this would be such an overwhelming task that it has been 
found necessary to take the accounts one by one out of the 
general ledger, as the work became too voluminous for that 
book, and segregate the work into units, carrying the totals 
only to the ledger. 

And so as one class of accounts become numerous they 
are taken out of this record and placed in another book. 
Accounts with banks are of this sort. A country bank hav- 
ing but a few correspondents could easily carry them in the 
general ledger ; while a city bank, w T hose accounts num- 
ber thousands, would divide and sub-divide these accounts, 
alphabetically, or geographically, into as many groups as 
were necessary. 

The controlling account on the general ledger is charged 
with all debits made to these accounts and credited with all 
credits, so that the sum of the balances on the one will equal 
the balance shown on the other. The principle of the con- 
trolling account is the same as if we were dealing with a 
person, crediting him with what he brings and charging him 
with what he takes. If we deliver to a ledger fifty items, 
we charge the ledger that amount; if fifty items are paid 
out on a ledger we give it credit, and the balance is the 
amount due from that ledger to the accounting system. 

The accounts that ordinarily would be found in a gen- 
eral ledger are: 

ASSETS. 

Demand loans (classified if desired). 

Time loans (classified if desired). 

Discounts. 

United States Bonds to secure circulation. 

United States Bonds to secure United States Deposits. 

United States Bonds on hand. 

Bonds and Stocks (total or in detail). 

Banking House and lot. 

Other Real Estate. 

Furniture and fixtures. 

Due from Federal Reserve Bank. 

Due from approved reserve agents. 

Due from other banks and bankers, savings banks and trust companies. 

Cash. 

Redemption fund with the U. S. Treasurer. 

Expense account. 

Taxes. 

Rent account (if bank own its building). 

Salaries. 

Interest accrued. 

Exchange paid. 

Interest paid on securities bought, etc. 

Premiums. 

Other nominal accounts. 



BANK ACCOUNTING 



287 



LIABILITIES. 
Capital. 
Surplus. 

Undivided profits. 
National Bank Notes Outstanding. 
Due to banks and bankers. 
Due trust companies and savings banks (generally reported separately as to 

savings banks. 
Dividends unpaid. 
Individual deposits. 
Demand certificates of deposit. 
Time certificates of deposit. 
Certified checks outstanding. 
Cashier's checks outstanding. 
United States deposits. 
Interest received (income). 
Discount received. 
Exchange received. 
Other nominal liabilities. 

On the general ledger or in the bond ledger there would 
be a separate account for each bond or block of bonds 
bought; each piece of real estate, etc. If the accounts with 
other banks were numerous as obtains in New York and 
other reserve cities, these would be taken out of the general 
ledger and kept in a separate book, totals only being carried 
to the general ledger. 

Journal Entries 

The journal is used to record the items day by day that 
go through the bank, and from which postings are carried to 
the general ledger. The totals from the discount book, in- 
dividual ledger records, etc., are carried to the journal and 
from thence to the ledger. The ledger is not a book of 

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INDIVTDTTAL LEDGES 



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288 THE PRACTICAL WORK OF A BANK 

original entry, and the journal is used as in all bookkeeping 
methods to record the daily events, but not to classify them. 
Therefore, we run the journal for this purpose. If real 
estate were bought, bonds bought or sold, salaries paid, etc., 
it would be a proper journal entry. Each department might 
run its own journal, or the totals might be reported to the 
journal clerk for entry on the general journal. Thus, if 
individual deposits as ascertained from the slips and from 
teller's record were $10,000, "individual deposits'" would be 
credited with the same amount, and technically cash would 
be charged. But since all records are of cash, the charge to 
cash does not appear. Likewise checks paid are charged to 
individual deposits and cash technically credited. Items 
coming in from other banks are credited to them ; items sent 
them are charged. Expenses are likewise charged, and in- 
terest credited. There is no journalizing as journalizing is 
commonly known, the journal being a cash journal, the en- 
try on one side or the other operating to debit or credit 
cash. Thus we do not say "Cash Dr. to Individual De- 
posits," for the mere entering on the credit side operates to 
charge cash. It is the purpose of the journal to assemble 
the amounts from all over the bank and aggregate them for 
posting to the general ledger. 

The Accounts with Depositors 

The individual ledger bookkeeper has no easy task. His 
work is a grind. In some banks he is an old man, in others 
a mere boy; but whatever the age, he grinds, and grinds, 
and grinds. He should, first of all, be easy with the pen, 
and make good figures. Good figures carefully made make 
good-looking books, but in the haste to get the grind over 
for the day much damage has been done to the looks of the 
books and ink spots follow. 

It is the duty of the individual ledger bookkeeper to 
keep the accounts with the individual depositors. He should 
not write up pass-books, this balancing being done in large 
banks by statement and balancing clerks, who make the 
debit entries in the pass-book or on the statement sheet from 
the vouchers, as a check upon the work. These accounts 
are kept in the main by the Boston Ledger, an old idea, but 
still used to a very large extent. 



BANK ACCOUNTING 289 

The Boston Ledger 

Briefly described the Boston Ledger is a large book, with 
the names of depositors, as a rule, printed down the left- 
hand margin, or left and right both, or center, allowing 
space for new accounts. Running across the page there are 
a number of spaces, one for each day, with a column for the 
deposits, checks and balance. Some have a column for the 
items in detail and a column for the total, so that one sub- 
traction only is necessary. The total of the deposits must 
equal the total received by the teller and charged to the 
bookkeeping department, and the total checks must equal 
the total checks charged likewise by the paying teller. Over- 
drafts are carried in red in the balance column, and so are 
not footed. Each page may be proven by itself. 

The old Boston Ledger is a long-time favorite and has 
many devotees. The names are usually printed in alphabet- 
ical arrangement, spaces being left for new accounts in their 
proper place. The author has found that a scheme of 
bookkeeping can better be understood by a study of the 
form than by an attempt to describe it, and the reader is, 
therefore, referred to forms shown herewith for ideas as to the 
work of the Boston Ledger. It has been in use so long and 
in so many banks that it has become part of the banking 
machinery of the country and recognized everywhere as a 
labor saver. 

The work of an individual bookkeeper consists largely 
in adding credits to and subtracting the debits from the old 
balance. The deposits are posted separately, but it is com- 
mon practice to post the checks in total, several checks con- 
stituting one charge. Before the items are entered on the 
ledger it is customary to run them off on an adding ma- 
chine or on a "scratcher," so that the total debits and credits 
to that ledger may be known to effect the proof. Items 
other than regular deposits and checks are designated by 
the letters "N" for note; "D" for discount, and "C" for 
collection. 

Some banks have a column to which are posted the 
clearing-house items, the total of this column equaling the 
total clearings received. Some banks list these items in a 
journal, using the adding machine, and write the name of 
the maker in between the figures, as a skeleton proof of 





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390 



BANK ACCOUNTING 291 

the clearings. If this is divided according to ledgers, of 
course the amount that goes on the ledger must be the same 
as the machine list. 

Where the pass-book is balanced a mark is made oppo- 
site the date to indicate that up to that point the vouchers 
have been returned and the book balanced. It is well to 
use the abbreviation "Bal." in red to indicate the fact. 

Merits of the Boston Ledger 

The advantages of the Boston Ledger are the quickness 
of posting and the daily proof, it being ideal in this respect. 
Of course, it does not show the depositor's record over a 
length of time, usually not longer than six months, but this 
information can be kept on the average book. 

The disadvantage of the Boston Ledger is the fact that 
unless much space is given to active accounts the details of 
the checks cannot be crowded in. Where a firm is known 
to have a large number of items, the account can be carried 
at the back, on a page ruled for that purpose. Or, the 
checks might be added by machine, the slip attached and 
the total listed as one item, as, for instance, "7 — $175.63," 
means that seven checks total $175.63, and are posted as 
one, and will be found pinned together in the files. By this 
arrangement a great many checks may be entered with a 
few charges. 

Postings are made directly from the tickets and checks, 
and the total of the credits must equal the total received by 
the receiving teller, and the total of the debits the total of 
the checks turned in by the paying teller. It is, there- 
fore, easy to locate an error. Each page may be bal- 
anced by itself, still further running the error down 
to a single page. Some banks enter the different transac- 
tions in colored inks; as, for instance, the clearing-house 
debits in green; checks paid over the counter in black; bal- 
ances in red, etc., the intent being to designate the class to 
which the item belongs. 

There are many modifications of the Boston Ledger, all 
based on the original idea — that of reducing the work to the 
minimum, making the postings quickly, and with ready 
proof. A bank contemplating a change in its methods 





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292 



BANK ACCOUNTING 



293 



should investigate the different forms for itself, and decide 
upon the one best suited to its needs. 

The Skeleton Proof 

As a check upon the work of the individual ledger book- 
keeper a skeleton ledger is often kept in loose leaf form, 
additions and deductions being made one day late. Thus 
all entries are made at one time and if the skeleton ledger is 
used as a statement system, the sheet goes to the depositor 
as a statement at the end of the month, the balance of which 
must agree with the ledger balance. It stands to reason that 
if the same computations are made independently of each 
other and from the same original sources the results must 
agree ; and not only the results but the items must be classi- 
fied the same or discrepancy will result. 

In making charges to the ledger the clerk must be on 
the watch for : Overdrafts ; stop payments ; forgeries ; raised 
checks; post-dated checks; stale checks; pa}onent against 
uncollected funds ; alterations in the check ; figures and writ- 
ing being different; signatures; indorsements; voucher 
checks to be properly receipted; checks of deceased persons; 
protested checks with fees accompanying; impression of 



STATEMENT 

PLKABB BXAM1NB AT ONCK 













J The National Exchange Bank { 

*>/ of Roanoke , Vi roini a 








OATS 


TOUCHERS 


DAY 


VOUCHERS 


DAY 


VOUCHERS 


DATE 


DEPOSITS : OLD BALANCES 


BSWBAUICEt 
















\ 

5 














BALABCE 




, 





FORM USED IN STATEMENT SYSTEM 



294 



THE PRACTICAL WORK OF A BANK 



i 



In Account with 

Manchester National Bank 

of New York. 

For Month of 


CREDITS 


Day 


Description 


Amount 


Day 


Description 


Amount 




JALANCE 


























































































































































































































































































































































































































































































































































TOTAL CREDITS 








TOTAL CHARGES DEDUCTED 








BALANCE 








Please examine the account, as this statement will be considered 
correct unless we are notified to the contrary within one month. 
Please notify of any permanent change in address. 



ACCOUKT STATED 



BANK ACCOUNTING 295 

protecting devices must agree with figures; signatures to 
checks under power of attorney; transfer of funds of cor- 
poration by officer to individual account; certified checks; 
notes that are to be charged to customer's account must be 
due; "no account" — careful search being made before re- 
turning the item as unpaid. 

The bookkeepers in large cities are often mere boys, and 
generally not mature men, and, therefore, need attention 
and coaching. They must be warned to look out for sus- 
picious points about a check. They must be on guard to 
catch forgeries. They must post the right amount to the 
right account, and not get names confused. 

There is a great difference in bookkeepers in this regard. 
Some will post anything as long as it resembles or reads like 
the man's name. In fact, the color of the check is enough 
sometimes, while another will detect a discrepancy in a signa- 
ture in an instant. This idea of instructions might be ap- 
plied to all of the other departments, but I have particularly 
mentioned bookkeepers as they are apt to be younger as a 
class, because it is the first responsible position that a clerk 
usually is given. 8 

The Average Book 

It is customary to keep a record of all depositors, par- 
ticularly with reference to their average balance. This is 
done on a card, properly ruled, showing the actual or aver- 
age balance at certain periods. By the use of the balance 
ledger it is an easy matter to obtain this information, the 
balance for each day being listed on an adding machine 
and divided by the number of days. Some banks loan ac- 
cording to the average balance and it is important to know 
what the average balance is. This may be the average daily 
balance, or the average monthly balance, preferably the aver- 
age daily balance, as it more accurately portrays the actual 
condition of the account. The average monthly balance is 
obtained by dividing the average daily balance for the twelve 
months by twelve. The average amount of discounts is 
also sometimes kept, in order to ascertain the proportion of 
loans to deposits; but the customer's liability to the bank, 
direct and contingent, is often kept by the liability ledger, 

»N. D. Ailing before New York Chapter. 



296 THE PRACTICAL WORK OF A BANK 

which shows the amount of the customer's direct indebted- 
ness and the amount for which he is secondarily liable on 
discounts. 

Rendering Accounts Stated 

The old method of rendering an account stated with the 
depositor of a bank was to balance his pass-book, return his 
vouchers, and if no complaint was made, to consider the 
balance as correct. This still obtains in many places, the 
returned vouchers being listed on an adding machine and 
only the total carried into the book "as per list." But nu- 
merous cases of forgery having gone through the courts 
where depositors have made claims against the bank for 
forgeries that occurred a considerable length of time before 
complaint was made, legislation has now in many cases 
made it obligatory upon the depositor to make claim for 
forged checks within a certain length of time after receiving 
his balanced account stated or be estopped to claim the ben- 
efit of the law of forged instruments. Banks, as a rule, now 
require the statement to be acknowledged, and vouchers re- 
ceipted for as a record that the account is in agreement with 
the customer's account and the vouchers have been exam- 
ined. 

It is but fair that the bank be put on guard if any ir- 
regularities exist in the relations^ with the customer, and 
the verification of vouchers and acknowledgment of the cor- 
rectness of the account are of utmost importance to both. If 
irregularities exist they will the sooner be detected if prompt 
and authentic verification obtains; and as a matter of good 
business and good banking every concern should have prop- 
er reconcilement made with its bank periodically. It should 
be done by one other than the regular clerk or officer who 
draws the checks and handles the cash. 

The Statement System 

The statement system is a sort of duplicate ledger, kept 
as a check upon the work of the individual bookkeepers and 
as a record to send to the depositor at the close of the 
month; for statements are rendered, as a rule, monthly in 
this scheme. Moreover, it keeps the vouchers from accu- 
mulating, some concerns under the old method sending in 



BANK ACCOUNTING 



297 



their pass-book only at long intervals and then only when 
requested. The writer knows of a lawyer who drew hun- 
dreds of checks and had not reconciled his pass-book with 
the bank for three years. 

The statement system has many points of advantage. 
First, it checks the postings; second, it checks the balances; 
and third, it eliminates the writing up of the pass-book. 



Guaranty Trust Company of NewYork 



lutein he,, Ih . Guaranty Trust Company of New York 



STATEMENT USED IN THE STATEMENT SYSTEM IN PLACE OF BALANCING PASS-BOOK 



When the bookkeeper has made his postings, the tickets 
and checks are sent to the statement clerk who enters the 
items on his sheet in detail or in total as may be decided 
upon, and strikes the balance, extending the same to a per- 
forated stub at the side. At the close of the day the bal- 
ances are called back, and must agree. If error has oc- 
curred in posting to wrong account, or omitting a check, it 
will here be detected. At the close of the month the vouch- 
ers are checked back with the statements, and a balance 
struck, and the sheet with vouchers sent to the depositor for 



MONTH OF 



In Account with 

Srtnttg Natttfttal Sanh 



NEW YORK. 



Previous balance and credits listed below $ 

Total of Debits as per machine list 

Balance forward 

Please examine at once. If no error iis reported within ten days the account will be considered correct 



C-Collection 
Pis-Discount 
F.X.-Foreign Exchange 



CREDITS ONLY 



Balance 



Please call for your statement on the SECOND BUSINESS DAY OF EACH MONTH and 
148 preserve it carefully jising PASS BOOK as Receipt for Deposits. 



STATEMENT RENDERED TO DEPOSITORS 



298 



BANK ACCOUNTING 



299 



his guidance, the stub remaining in the bank. Balances are, 
of course, carried over to a new sheet for each depositor as 
the basis for the next month's work. The addressing ma- 
chine is coming into play here as a ready means of listing 




ADDRESSING MACHINE AND ITS WORK (BELOW) 

(Courtesy of the Addresscgraph Co., Chicago, 111.) 



the headings for these accounts. It is a quick and most 
excellent method of keeping the accounts with depositors. A 
slip is enclosed, asking the depositor to report promptly the 
receipt of vouchers and to verify the balance. 



^ 



m 



ANDERSON & CRAWFORD, 
1921 BROADWAY, 

NEW YORK.N.Y. 




{ oT. 







300 THE PRACTICAL WORK OF A BANK 

Opening a New Ledger 

Comparatively a few years ago the only system of 
keeping the individual accounts in banks was the old 
three-column balance ledger and the "Boston" ledger. Both 
of these ledgers were permanently bound volumes, and 
when one was rilled up it was necessary to open a new book 
and transfer all the names and balances from the old ledger. 

Within recent years, however, there has been almost a 
transformation in bank bookkeeping. Improved methods 
have been introduced. One of the most important 
is the loose-leaf system of keeping the individual ledger. 
The greatest value of the loose-leaf ledger lies in the fact 
that it eliminates the necessity of opening new ledgers and 
transferring accounts. There are also other advantages 
which it possesses. In spite of these facts, however, there 
are still many banks that cling to the old bound ledgers. 

The opening of the individual ledger in a bank is a diffi- 
cult task. The individual bookkeeper's time in the aver- 
age bank is usually fully taken up with the daily routine of 
posting and proving his ledger, and although the opening 
of a ledger requires hours of extra work, it must not inter- 
fere with his regular daily transactions. This is possible 
only by putting in a great deal of time after the usual bank- 
ing hours. Some bookkeepers have been known to work all 
night in order to get all the balances transferred from one 





A 


E 


I 





TJ 


Y 


Totals 


A 


60 


100 


55 


40 


25 


10 


. 290 




B ♦.„. 


110 


140 


96 


103 


80 


30 


559 




C 


79 


93 


52 


60 


24 


11 


319 




Total No. 
of pages 
for accts. 


&49 


333 


203 


203 


129 


51 


1168 



FIGURE 1. 



BANK ACCOUNTING 301 

ledger to another. Because it is such a tremendous task, 
they are apt to put it off as long as possible. When they 
do so the accounts soon begin to "overlap," and when they 
are thus confused, posting is slower and less accurate. 

Some banks that use the bound ledger purchase books 
only of ordinary size and have a custom of opening new 
ledgers at certain regular periods, usually January first of 
each year. Even though the old ledger is not filled a new 
book is opened at these stated periods. It is advisable, how- 
ever, to use ledgers as large and^hick as possible, and yet 
capable of being properly handled. The longer the book 
can be made to last the better it is. It not only defers the 
arduous labor of opening a new ledger, but it is more con- 
venient for reference, etc., as it keeps the accounts under one 
cover extending over longer periods. 

When an individual ledger is to be opened the first 
thing to be done is the "spacing" of the new ledger. In 
order to properly space the ledger the bookkeeper must ap- 
proximate the number of pages that are to be assigned to 
each account from the old ledger. To do this he must go 
over the accounts carefully in the old ledger and determine 
how much space each has used within a given time. 

Some bookkeepers simply begin by copying the names 
from the old ledger approximating the amount of space to 
be given to each as they go along, and following the order 
of the accounts in that ledger. This, however, is a poor 
method, as the accounts in the new ledger in nine cases out 
of ten should not follow in the same order as those in the 
old ledger. The chances are that some accounts have over- 
lapped and many have been crowded into spaces in which 
thejr do not logically belong. The pages cannot be appor- 
tioned with any degree of accuracy at all when this scheme 
is used. 

Of course, in spacing a ledger and entering the names 
of the depositors, the balances are not forwarded at the 
same time. The spacing is accomplished and all the names 
are entered before any of the balances are transferred. The 
bookkeeper does not attempt to space his ledger and for- 
ward all the names in one day. In fact, most of them be- 
gin about a month before the date set for forwarding the 
balances to apportion the pages and copy the accounts. 

Another method used is to write the names of depositors 



302 THE PRACTICAL WORK OF A BANK 

on slips of paper, with the number of pages to be allotted 
to each account, and insert each slip in the ledger at the 
page the account is to occupy. This method, though not 
entirely satisfactory, is much better than the first. If the 
spacing does not work out right under certain letters of the 
alphabet, the slips may be easily removed and replaced to 
readjust the apportionment. After the slips are all insert- 
ed, the names are copied in the book from them. The loca- 




ADDING MACHINE AS USED FOR BANK STATEMENTS— SPECIMEN OF WORK P. 303 

(Courtesy of the Adder Machine Co., Wilkesbarre, Fa.) 

tion of each following account is determined by the location 
of the slip in the ledger and the number of pages indicated 
on the slip. 

Making Allowances for New Accounts 

In spacing a new ledger, allowance must of course be 
made for new accounts which are likely to be opened during 
the life of the ledger. This space should be apportioned as 
accurately as possible, as a failure to do so is sure to cause 
the overlapping of the accounts. For instance, suppose the 
space apportioned to the vowel "i" under A has been filled 
with new accounts and a man by the name of Aikens opens 
an account. This account will then have to be entered under 
some other vowel in the space probably already apportioned 
to some other account. This account will consequently run 



BANK ACCOUNTING 



303 



into the account which has been crowded into the space 
which did not belong to it. 

To secure accuracy in the spacing of a new ledger it is 
necessary to divide and sub-divide the ledger; that is, so 
many pages are first to be apportioned to each letter of the 
alphabet and each letter is sub-divided into vowels, so many 
pages being given to each vowel. Of course, all ledgers 
should have the vowel index, as with it the accounts can be 
located with greater ease and dispatch. The index is usual- 
ly bound in a separate cover from the ledger, as an index in 
a large, cumbersome ledger would be rather inconvenient 
for reference. 



• 


tfc.Nally Sayee 4 Dcale in Account with 

^United States National Bank 

ofOmaha.Neb. June 1911 

PLCASt IXAUlKt ATONCC II ~> error isreporr«o mm rtn oojs.mt occo.nr mil oe eons.owen co-r«cr. 




NO 

7 


Checks 


CHCCK3 | Checks j Date 


0EPO3.TJ 


0m! e.f.Scc 


Balance 




li 






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PLEASE CA 
NOTIFY BA 


LL 

NK 


OR ST 
IF YO 


ATE*. 

en/ 


EN 


r FIRST OF EACH MONTH 
E YOUR ADDRESS 















STATEMENT RENDERED DEPOSITORS MONTHLY 

(Courtesy of the Adder Machine Co., Wilkesbarre, Pa.) 



20 



304 THE PRACTICAL WORK OF A BANK 

One method used by some banks, which will probably 
secure the most accurate spacing of the ledger is that out- 
lined by Mr. Patten in his work on "Practical Banking," 
as follows: 

"We should now take the old ledger and ascertain the 
length of time it has been used and estimate the number of 
pages each account will require in the new ledger, noting 
same in pencil in front of the name in the index. After 
this process has been completed, add the number of pages 
allowed for the accounts in each vowel, then prepare a dia- 
gram like Figure 1, which is prepared on a basis of an A 
to C, 1,500-page, ledger, and enter the number of pages 
allowed for each vowel. 

"On the diagram shown there is a total of 290 accounts 
in 'A' divided among the vowels; 'B,' 559; S C,' 319; making 
a total of 1,168 open accounts. The footing of the accounts 
is proven by both vertical and horizontal addition of totals, 
which should always be done, or one may be thrown out on 
the general result. Deduct the whole number of pages al- 
lowed to the accounts on the index from the total number of 
pages in the ledger, and you ascertain the number of pages 
to be dstributed among the vowels. 

"In the illustration there are 332 extra pages (1,500 
minus 1,168 equals 332) ; therefore that number of pages is 
to be divided equally among the vowels. To find the num- 
ber of pages to be allotted after each vowel, divide decimally 
the total of the extra pages allowed for the accounts, as 
follows: 332 divided by 1,168 equals .2842. Now multiply 
this quotient by the total number of pages allowed for each 
vowel, and the result, as per Figure 2, gives the number of 
pages to each vowel. These totals are also proved horizon- 
tally and vertically, which is of importance. Of course, in 
figuring decimally, one may be obliged on account of frac- 
tions to allot a few extra pages to the larger vowels to 
make the scheme prove, deducting them from another vowel. 
"After you have carefully schemed out the number of 
pages, as in Form 2, add the total allowed in your estimate 
to the total of extra pages for 'A,' and the result gives you 
the page on which that letter should end, in this case page 
373. Letter 'B' should commence on the following page 
and end on page 1091. 'C should commence on page 1092 
and continue to the end of the ledger. After this has been 



BANK ACCOUNTING 



305 





A 


E 


I 





U 


T 


Totals 


A 


17 


28 


16 


•12 


7 


3 


83 


B 


31 


40 


27 


29 


23 


9 


159 


<3 


22 


26 


15 


17 


7 


3 


90 


Total No. 
of extra 
pages. ^ 


TO 


94 


58 


58 


37 


15 


332 



FIGURE 2. 



done enter in ink opposite each name in the index the num- 
ber of the page on which the account is to commence, keep- 
ing a tally by adding to the page number the number of 
pages allowed for the account in question as per your pencil 
memoranda. Proceed carefully through the index, proving 
each vowel by adding the total allowed for that vowel to the 
previous footing, thus: 

Total number of pages allowed for "Aa," as per scheme 60 

(Last "Aa" should be entered on page 60.) 
Extra pages allowed for "Aa" 17 

77 
(Therefore the first "Ae" should be on page 78.) 

Total number of pages allowed for "Ae" 100 

(Last "Ae" should be entered on page 177.) 
Extra pages allowed for "Ae" 28 

205 
(Consequently the first "Ai" should be on page 206.) 

"And thus proceed through the entire index. Any dif- 
ferences should be corrected, and each letter should end on 
the page previously determined upon." 

A chart very similar to the one just described and rep- 
resented by Figure 3 is used by some bookkeepers. In the 
extreme left-hand column are placed the letters of the alpha- 
bet, the six following columns are for the vowel sub-divisions 
of each letter. The last column shows the number of pages 
assigned to each letter. The large figures under each vowel 
represent the number of pages which are to be assigned to 



306 



THE PRACTICAL WORK OF A BANK 





A 


E 


I 





U 


V 


Total 


A 


60 


6/ 
100 


55 


40 


25 


3L8/ 
10 


290 


B ... 


a?/ 

110 


¥0/ 

140 


S4f 
96 


637 
103 


80 


s\a,o 
30 


559 


C. 


79 


Ml 
* 93 


50 


60 


24 


11 


319 


Total 


249 


333 


203 


203 


Z/&7 
129 


51 


1168 

.1. . 



FIGURE 3. 



it. The small figures in the upper left-hand corner of each 
division show the number of the page upon which the book- 
keeper is to begin writing the names under each vowel. 

In spacing a ledger the bookkeeper should remember 
that as a rule the letters of the alphabet requiring the larg- 
est number of pages are B, C, H, M, S, and W. The let- 
ters U, X, Y and Z usually require fewer pages than any- 
other letters. In fact, it is hardly necessary to subdivide 
these letters into vowels. 

Another suggestion which might be of some advantage 
in spacing the ledger is to enter the letter and vowel on the 
upper corner of each page to which it belongs. This method 
practically indexes the ledger all the way through and 
makes it unnecessary to consult a separate index. It will 
also assist in posting. 

When the bookkeeper has succeeded in spacing his ledger 
the most important part of the task of opening the new 
ledger is accomplished. Taking the index or the charts as 
prepared, he can enter the ledger headings with sufficient 
assurance that in the end it will figure out right. After 
the new ledger has been properly spaced and all the names 
transferred, the next step is to transfer the* balances. 

Before doing this some accounts that have been car- 
ried for some time in the old ledger can be weeded out. 
Some accounts will perhaps have only a few cents' balance 
which has been standing for a long period. Some of them 



BANK ACCOUNTING 307 

may have been dead for months. The balances have been 
left standing either because the depositor is dead, has moved 
from the city, or has simply neglected to withdraw it and 
close the account. When such balances are only a few cents, 
the bank is usually safe in charging them off and closing the 
account. These balances may be credited to profit and loss, 
but of course a proper memorandum should be made of the 
transaction, so that any time the depositor asks for a state- 
ment of the account, the amount could be credited back to 
his account. 

There will be other accounts with larger balances, which 
perhaps have been opened temporarily for some particular 
purpose, and although dead, the depositor has neglected to 
withdraw his balance. Such depositors should be notified to 
check out the balance so that the account can be closed and 
a statement rendered. 

Some bookkeepers transfer all the balances on the ledger 
the same day the last posting is made for that day. This is 
a tremendous task and will probably keep the bookkeeper 
busy until the "wee hours" of the morning, but it is no 
doubt the most satisfactory way when completed. Just be- 
fore transferring the balances to the new ledger it is neces- 
sary when this method is pursued to first take off a trial 
balance of the old ledger. If the trial balance does not come 
out right every effort is made to find the discrepancy. The 
balances are very carefully checked over from the ledger at 
least once, to see that they have been properly copied. 

It is not absolutely essential, however, that the trial bal- 
ance of the old ledger comes out right before the balances 
are transferred to the new ledger. In fact, in order to ac- 
complish the task within the allotted time it is necessary to 
begin transferring the accounts as soon as the trial balance 
is taken off and checked up. As soon as all the accounts are 
transferred a trial balance is then taken off of the new 
ledger. If the trial balance of the old ledger does not agree 
with the trial balance of the new ledger it is, of course, evi- 
dence that the balances have not all been transferred cor- 
rectly. The quickest way then of finding the error is to 
check up the trial balances with each other. As soon as the 
two trial balances are made to agree it is ample proof that 
the balances have been correctly transferred from the old 
ledger to the new. This much accomplished, the bookkeep- 



308 



THE PRACTICAL WORK OF A BANK 





TRIAL 


BALANCE SHEET? 








New Balances 


Old Balances 








4 2 0.3 5 


2 3.4 51 




: 




31.0 3 


4.2 5 1 








21.0 4 


5.7 0! 




! 






1.2 5 1 


New Ove: 




3 6.0 8 


1 2 0.5 6 1 




j 




1,0 8 0.2 7 


3 5.9-15 








3 01.0 3 


' 3 4.0 5 1 






Old Overaft 


4 0.5 6 










2.4 5 


6 3.6 4 1 








13.35 


4.2 51 




1 




2.0 3 0.4 5 


1,023.051 








4 1.0 4 


6.0 01 








3 0.0 


4 4.0 1 






New Account 


3 3 0.5 






I 




2 0.4 5 


1 5.0 6 1 




1 




5 3 0.8 


5 3.0 1 








7 2.3 7 


4 0.^6 1 




' 1 




7 7 3.0 


4 0.7 01 




( | 


Old Overaft 


5 2.4 






: 




7 2.0 4 


5 0.2 4 1 




! 




7 7 2.0 4 


40.0 71 




1 




8 4.2 


5 0.781 




i 




5 2.0 4 


6 0.3 5 i 




; 


New Account 


8 0.4 3 










1.2 5 


3 1.0 3 1 




i 




3.4 5 


2.4 51 




! 




4.0 5 


1.5 51 




, 






8.3 1 


Closed 


Account 




4 4 6.0 9 


1 5.0 9 1 








3 6.0 


3 0.0 7 1 








7 2.0 


6.0 31 




! 






1 2.4 5 1 


NewOverdft 




3 3 4.0 5 


3 1.0 5 1 






total Dr 


9,3 14.815 


~ 2,6 6 3,34$ 


Total 


Of 



TRIAL BALANCE SHEET MADE ON A BURROUGHS DUPLEX MACHINE. BOTH COLUMNS 
ARE LISTED AT THE SAME OPERATION AND INDEPENDENT 
TOTALS TAKEN AT THE SAME TIME 



BANK ACCOUNTING 309 

er may then search for the difference which may exist be- 
tween the trial balances and the balance as shown by the 
general ledger. 

Some bookkeepers do not take a trial balance off of the 
old ledger before transferring the balances to the new ledger. 
They simply transfer the balances to the new ledger and 
take off a trial balance of that ledger only. The defect of 
this method, however, is apparent. By this method the only 
way the bookkeeper has of proving that he has forwarded 




THE BUBROUGHS DUPLEX MACHINE THE MACHINE WITH 

• THE DOUBLE SET OF ADDING WHEELS 

all the balances correctly is by checking up the trial balance 
of the new ledger, or the new ledger itself, with the balances 
on the old ledger. This is not only a more arduous task, 
but takes longer, and even when the process is completed is 
not conclusive proof. 

One bookkeeper has a rather unusual method of trans- 
ferring accounts from the old ledger to the new. He trans- 
fers them in sections. That is, one day he will transfer the 
balances under a certain number of the letters of the alpha- 
bet. He takes, say, the balances under A, B, C, and D, the 
first day, those under E, F, G, and H, the second day, and 
so on, until all are forwarded. Each section transferred to 
the new ledger is proven with the corresponding section of 



310 THE PRACTICAL WORK OF A BANK 

the old ledger. As each section is forwarded, no more items 
are posted to that section on the old ledger. The posting 
is done to the accounts that have been transferred to the 
new ledger, while the posting is still done to the accounts in 
the old ledger that have not been transferred. Under this 
method the posting is done in two separate ledgers until all 
the accounts are forwarded. There is a great deal of risk 
about this, owing to the danger of getting the ledgers con- 
fused. For this reason most bookkeepers would not ap- 
prove of such a method. 

There is another method by which only part of the bal- 
ances are transferred each day, but from the first day any of 
the balances are transferred the posting is done from that 
date in the new ledger. For instance, the balances under 
A, B, C, and D only are transferred. Deposits and checks, 
however, are posted to the accounts under the remaining 
letters of the alphabet, just as if the balances had been for- 
warded from the old ledger. Of course, for the time being 
the postings cannot be added or deducted from the previous 
balances, which have not as yet been transferred, and car- 
ried to the balance column. As soon as these balances are 
forwarded, however, the accumulated credits and debits are 
added or deducted separately from the balance and each 
balance is forwarded to the balance column. As soon as 
all the balances are transferred the trial balance must agree 
with the old ledger. 9 

The sheets that are shown on the flat platen of this ma- 
chine are the monthly statement of account on top, the ledg- 
er page between the two carbon strips, and the proof sheet, 
or auditor's journal page at the bottom. The machine can 
be operated on just the ledger page, or the ledger page and 
auditor's proof sheet without the statement, if so desired. 
The registers at the top of the picture accumulate totals 
and the crossfooter at the right figures each account as the 
postings are made. 

The operation is as follows: The old or last balance is 
typed into the first column, and as it is typed, without any 
other operation, it is picked up or accumulated in the cross- 
footer at the right. The next four columns are checks paid, 
and as these are typed they are added in the registers at the 

PEdgar G. Alcorn in The Bankers Magazine. 



BANK ACCOUNTING 



Sll 




BANK BOOKKEEPING MACHINE LISTS DEPOSITS AND MAKES ITS OWN ADDITIONS AND 

SUBTRACTIONS ITS OPERATION IS AS TOI-LOWS: 



top of the machine and are automatically subtracted in the 
crossfooter from the old or last balance. The next column 
is for deposits, and as the deposit is typed it adds in the 
register at the top of the machine, and also, without further 
operation, adds in the crossfooter. 

The crossfooter now shows the depositor's new balance, 
and the new balance is then typed in the last column, and 
as it is typed it subtracts in the crossfooter and the cross- 
footer clears. The fact that the crossfooter clears proves 
that the entry has been accurately made, or else figures 
would remain in the crossfooter. The checks paid accumu- 
late in the registers at the top and the deposits accumulate 
and show at the end of the day a total of all checks paid 
and a total of deposits. 

One of the most valuable features of this machine is the 
auditor's journal, or proof sheet. All transactions of the 
day that are entered on the machine are entered on the proof 
sheet so that the cashier or whoever is responsible for the 



312 THE PRACTICAL WORK OF A BANK 

control of accounts has the complete detail before him, 
which shows the name of the bookkeeper that makes the en- 
try, and name of each individual depositor whose account 
has been affected and shows his last and his new balance. 

This picture shows operation on loose leaf ledgers, but 
the machine is also constructed for holding an entire ledger, 
so that each account may be posted without taking the 
leaves out of the ledger. 10 

Balancing Pass-Books 

In the balancing of the depositor's pass-book the bank 
comes into close personal touch with its depositors, and 
should not regard this as a necessary evil, for it should be a 
very essential detail. Entries should not be made carelessly, 
as if it did not matter, for the book is the depositor's re- 
ceipt for his deposit, and is important both to him and the 
bank. A slovenly kept book will indicate that the bank is 
careless, which it cannot afford to be. However ill the 
depositor may treat the book, the bank should use care. 

Some depositors do not want a statement rendered, but 
want their book balanced, and vouchers listed in the book; 
and if so, it pays to accommodate them — they may have a 
reason; and a bank must live by its depositors. The old 
Irishwoman had it right when she said: "It's the likes o' me 
that keeps the likes o' you on your job." 

This balancing should not be done by the bookkeeper, 
nor from the ledgers, and deposits not entered by the teller 
should be entered from the slips. Some banks are, of course, 
so small that balancing must be done by the bookkeepers, or 
some clerk who is general utility man. 

When the account is overdrawn the account cannot, of 
course, be balanced and the vouchers should not be returned 
until the overdraft has been made good. The vouchers are 
the bank's evidence of payments and should not be returned 
until the matter is adjusted. 

Books should be balanced frequently, and if not sent in 
should be called for and not allowed to run long without 
balancing. This should be insisted upon. Country banks 
are more lenient than city, as their methods are not so rigid 

ioBy courtesy of the Elliott-Fisher Co., Harrisburg, Pa. 



BANK ACCOUNTING 313 

and their help often insufficient to do all things as per 
schedule. 

In the statement settlements, some banks do not render 
the statement without the book, making the balance therein, 
while others ignore the book and render statements month- 
ly. Checks are now usually run off on the adding machine 
unless for some reason they are to be listed in the book in 
ink. Deposits without the book are a nuisance, and inas- 
much as the entry must be made from the ticket, which has 
been filed away, such practices are not to be encouraged. 
Duplicate deposit tickets are sometimes issued as a receipt, 
to be entered in the book when presented. Moreover, when 
the book is left for balancing, the entries cannot be made 
while the book is in the bank's possession and for this 
reason the statement system is the better way. 

The Stationery and Supplies 

Buying stationery is like buying a woman's garment — 
you can pay as much as you like, and must be a judge of 
quality or you pay too much. The waste in supplies is 
enormous. Buying is often done without regard to the util- 
ity of the article, or the needs of the business. Scratch pads 
are often made of finely engraved linen letter heads which 
could have been cut down and used for better purposes. 
Pencils, pens, erasers and stationery in general are wasted 
for lack of system. 

A bank of all institutions should not be small, and 
should buy for quality as well as for cost; but it can be sav- 
ing. Ink should be bought in quantities and kept in good, 
non-evaporating ink wells. Pens should be purchased in 
great gross lots and doled out as needed. Books should be 
ordered in time to allow for proper "seasoning" or they will 
come in "green" and, therefore, warp, and prove unsatis- 
factory. Where there is likelihood of frequent change of 
officers, letter heads should not be bought in large quantities, 
for a change makes the old valueless. 

Check-books and pass-books constitute a very large item 
of the stationery expense and should be bought in quantities 
after competitive bidding on the same paper and for the 
same amount. So close does this competition at times be- 
come, that it is reported that a firm lost money on a bid of a 



814 THE PRACTICAL WORK OF A BANK 

million checks where it neglected to estimate the cost of the 
string and delivery charges, the checks going to different 
branches at different times during the year. 

Stationery is best kept in a stock room arranged in the 
form of a card cabinet with compartments of various sizes, 
labeled or numbered. The forms should be indexed as to 
number and particularly as to title. The printer should 
number the form as, for instance, "55-1,000 6/9/14," indi- 
cating that the order was placed on June 9, 1914, for 1,000 
and is number 55 in the index of forms. The cost can be 
indicated in the index of this form. When the order has 
been placed and delivered and the receipt of goods checked 
by the clerk in charge, the bill is referred to the proper 
officer for payment. 

The stock is checked over occasionally and when the sup- 
ply of any article is running low, a new order placed. No 
form should be ordered without going over carefully to see 
if it cannot be improved. Few forms are perfect. One 
large bank in New York keeps account with each form, 
accounting for all received by a careful system of audits. 

One bank keeps its records of stationery and supplies by 
a regular double entry system of bookkeeping. When a 
new order of envelopes is received, the "envelopes" account 
is debited with, say, 25,000 and a general account credited 
with the same amount and the cost put opposite the entry 
in this account. When some department needs envelopes a 
requisition is made on, the stationery department, and the 
amount charged to the account of that department, and 
credited to the envelope account. Charges are made to the 
accounts of the various departments which use the enve- 
lopes to ascertain the cost of operation. Thus, a balance 
sheet can be taken off proving the exact amount in the 
supply man's hands. Moreover such procedure shows ex- 
actly how much stationery has gone to each department and 
its cost. The time involved in keeping such a system makes 
it more expensive than the amount saved would warrant, 
except in the case of very large banks where some exact sys- 
tem is absolutely necessary. In a smaller bank a careful 
watch for wastefulness and a reasonable investigation of 
requests for supplies will serve the purpose. 

The chief clerk often has the care of the records of the 
bank, by which is meant books, letters, tickets, etc., which 



BANK ACCOUNTING 315 

have ceased to be used by the various departments, and 
have become the past records of the bank. In many grow- 
ing banks, and where consolidations have taken place, this 
is a serious matter. One man should see that everything is 
properly labeled, dated and stored away where it can al- 
ways be found quickly. The deposit tickets, exchange slips, 
letters of the correspondence department, etc., should be 
kept about six years. All books should be retained for 
about the same period, except the ledgers which should be 
retained as long as possible. It is advantageous to keep 
records and items which are likely to be called for at fre- 
quent intervals, in such shape for a year or more back, that 
they can be gotten at quickly. Unless a very complete sys- 
tem of storing all these records or vouchers is devised and 
very carefully followed up by some one in authority, they 
are bound to get into a chaotic condition. 

The Bank's Expenses 

In paying the bank's expenses, no better form could be 
devised than the voucher check, which classifies the charge 
for entry to expense account. After the invoice has been 
properly verified and payment authorized, the amount is 
entered on a voucher record with the name, amount, date 
and purpose, and classification, and voucher check issued. 
When this comes back it is charged to expense account un- 
der its regular heading as indicated on the voucher. The 
unpaid vouchers would indicate the amount of unpaid bills. 
Or, if desired, the entry could be made against expense ac- 
count as soon as the check was issued, which would be 
preferable. Some banks pay by cashier's check, cash over 
the counter, and take simply the receipted invoice as 
voucher. But a uniform record is much to be desired, and 
the original invoice can be attached to the voucher check 
after it has been paid. 

Some banks make the expense items a matter of record 
on the minutes, which would seem a waste of time and 
effort, a proper audit by a committee being all that is neces- 
sary. But having done so in the past they must always 
continue to do so. 



316 THE PRACTICAL WORK OF A BANK 

Petty Cash 

There are many petty items that must be paid for and 
for which no voucher can be had, such as car fare, stamps, 
etc., and these should have tickets properly initialed; 
but petty cash can best be kept by the "imprest system." 
Some banks keep these petty items and hold them as cash 
for a time and charge them up. The imprest method is 
better. In this system, the teller is charged with an amount 
sufficient to cover a month's petty expenses, and this charge 
stands against him, the cash being segregated from his coun- 
ter money. As he pays bills, his petty cash runs down, 
until it becomes necessary to replenish the petty cash, when 
he renders account of the items paid. Check is drawn to 
cover, or cash taken out of regular cash, which restores the 
account to its original amount. This is recommended by ex- 
perienced accountants as the proper way. A petty cash- 
book may have columns to provide for classifying the pay- 
ments as expense account classifies the larger payments. 

Expense account should be run on the columnar idea, 
with a column for each class of expense, such as light, heat, 
stationery, incidentals, etc., so that the aggregate of the ex- 
pense items may be known, and if desired compared from 
year to year to ascertain the relative cost of management 
and expenses. 

Changes in Accounts 

For the information of the officers, changes in accounts 
are noted from day to day, particularly those that have been 
closed. The reason is ascertained, if possible, so that any 
error or misunderstanding may be corrected. It costs con- 
siderable to secure an account, and it should not be lost to 
the bank without good reason. Accounts opened and closed 
are reported to the officers daily, with details concerning 
balances, etc., for their guidance. 

In the competition for accounts, some banks make note 
of checks going through their hands and thus obtain a list 
of the depositors of other banks. This gives the executive 
force definite information to work upon in securing new 
business. And as soon as a liquidation or an absorption is 
rumored, the competitor banks bestir themselves to obtain 



BANK ACCOUNTING 817 

the accounts of the bank going out of business and this is 
the clue upon which they work. 

Care or Checks and Deposit Tickets 



Until the vouchers are returned and the account recon- 
ciled, the checks paid by the bank are important documents 
and are given careful attention. They are filed in check 
files, under the name of the depositor, as they are paid and 
not according to their date. The pass-books are written up 



New Business 



SL 



Check Desk f!*— — 

ACCOUNT CLOSED S^f^.fe 



Remittance Dept. _^..^^ < — — 

Name.. .^cr£v/v\_^S>, JV^a-j^tsC^-**/ ^ — — P 

U art rl ~ o<> / o a :•>. /-> *%* «JV^i»* __ . 



Address 



.L'ojr. &*... ..... 6 ^ . <-k-w-«~ 



Date closed ^ .^b—*". ... -- .^-JB. ..- _ Balance withdraum .. ..JQ^dr.^x&.J. ■ 

Reason; for Closing ;.. -^?f <?iw*s. ■a^er-iA-*-. g^iAc..;r.,gr£:,s ^sJu^jsa^us^jc^.^^..^ 

Remarks : 



MEMO. OF ACCOUNT CLOSED,, FOR INFORMATION" OF CREDIT DEPARTMENT 

from these vouchers and in the statement system they are 
used independently of the ledger records. Checks are can- 
celled by mutilating as soon as they are paid. 

Deposit tickets are filed according to date and the sub- 
division of the ledgers. They are, of course, not returned 
to the depositor, being kept for a certain length of time and 
then destroyed. Some banks keep them indefinitely. One 
large New York bank keeps the letters which come from 
depositors, and are used as deposit tickets, for a certain 
length of time after the account has been reconciled, and 
this is given careful attention. After reconciliation the let- 
ters are destroyed after a stated time. 



318 



THE PRACTICAL WORK OF A BANK 



Keeping the Bank's Books by Machinery 

(Addendum to Second Edition) 

In the preface of this work it is said that the only material 
change that has taken place in banking methods during recent 
years has been the installation of mechanical appliances for 




CHECK CANCELLING MACHINE AND ITS WORK 

(Courtesy of B. F. Cummins Co., Chicago, 111.) 



bookkeeping purposes ; and nowhere is this change more no- 
ticeable or effective than in keeping the accounts with depos- 
itors, in respect to both the internal and external operations. 

Mechanical bookkeeping is as far in advance of the pen- 
and-ink method as the typewritten letter is preferable to the 
hand-inscribed missive. The mechanical bookkeeper has for 



BANK ACCOUNTING 



318a 



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818b THE PRACTICAL WORK OF A BANK 

its aim: first, the saving of time in the more rapid posting 
possible; second, the elimination of the nerve strain of con- 
stant mental addition and subtraction; third, automatic pre- 
vention of overdrafts; fourth, the improved appearance of 
the books; fifth, the avoidance of opening new ledgers; and 
last, but by no means least, is the abolition of the pass book, 
other than as a memorandum of deposits. 

The statement system which coordinates with the machine- 
posted ledger, acts as a check on the work, and at the end of 
the month constitutes the "account stated" with the depos- 
itor, thus eliminating the writing up of pass books. In the 
average bank, running one or two old style and pen-kept 
ledgers, the writing up of pass books necessitates consulting 
the ledger for missing entries, and this cannot be done with- 
out disturbing the bookkeeper, and results in night work with 
all its attendant unpleasantness. 

By merely pressing the keys and the electric release, the 
machine does in one operation what would require the follow- 
ing five operations by hand : 

1. Writing the record. 

2. Adding deposits to old balances. 

3. Subtracting checks. 

4. Extending balances. 

5. Inserting the date for each entry. (The machine is set for the 
day with proper date, and prints the date for each item until the date key 
is changed.) 

Speed is obviously possible when it is considered that the 
machine prints dates and ciphers automatically and finds its 
own proper columns without using a "spacing key." The 
operator is concerned only with getting the items on the 
proper sheets and pressing the keys correctly. The time re- 
quired to take a sheet from the ledger, insert in the machine, 
"pick up" the old balance, list three checks and one deposit, 
and strike the balance is not over fifteen seconds, the book- 
keepers of the First National Bank of Jamaica, New York 
City, maintaining this speed for hours. 

How the Ledger Is Posted by Machine 

Loose-leaf ledgers or cards are used, each page represent- 
ing an individual account. These are arranged alphabetically 
in binders convenient for carrying the sheets in such a way 



BANK ACCOUNTING 318c 

that the account can easily be located. The headings are 
made by the Addressograph, shown on page 299. 

The machine operator opens the ledger at the first ac- 
count for which he has checks or deposit slips. He drops the 
ledger sheet in the machine carriage and throws it into print- 
ing position. 




MAKING A LEDGER POSTING BY MACHINE 



He then lists the old balance, the checks, and deposits. 
The machine spaces itself, not even requiring the spacing key 
used on some typewriters. The old balance and deposits are 
automatically added, the checks automatically subtracted, and 
the new balance is extended simply by depressing the total 
key. The sheet is thrown out by one pull of a lever on the 
carriage. 



31Sd THE PRACTICAL WORK OF A BANK 

Overdrafts Automatically Detected 

An overdraft is immediately detected, because the oper- 
ator is unable to take a total in the balance column. Inability 
to take a total warns the operator of the overdraft. He 
shifts the control lever to "subtract" position, takes two spac- 
ing strokes, and takes a total which is marked "OD." 

The method of posting that has been in use in the First 




THE BURROUGHS BOOKKEEPING MACHINE 



National Bank of Jamaica for a period of six months, and has 
worked without an error, is as follows : 

As the checks leave the teller's cage they are listed and 
turned over to a clerk who examines them for signature, fill- 
ing, dates, and endorsements, and sorted alphabetically; 
they are then arranged, checks in one pile and deposits slips 
In another. Postings are made by the Burroughs Machine 
shown herewith, the "short items" being taken out and sub- 



BANK ACCOUNTING 



318, 



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318f THE PRACTICAL WORK OF A BANK 

tracted from the adding machine list. The deposits and 
checks are then run on the permanent check and deposit reg- 
isters by the adding machine, and the total must agree with 
the list first made, less the short items. The next morning 
the statement clerk makes the same entries on the statement 
sheets, "off-setting" his sheets as the bookkeeper has already 
done. The accounts that have been changed, which are indi- 
cated by the off-set sheets, are called back as to the net bal- 
ance only, which of course must agree with the ledger ac- 
counts, for the same work has been done by two different men 
on two different sheets from the same original items. The 
deposit tickets are bundled and filed for the day, and the 
checks are filed in the check files. 

Before the installation of the machine system, the clerks 
were obliged to work from two to four nights a week, prin- 
cipally writing up pass books ; whereas after the machine sys- 
tem was introduced night work was reduced to one night a 
month, at which time the vouchers are prepared for distribu- 
tion. More work is done with fewer men in from one to two 
hours less a day than formerly was the case. 

PI! Safeguarding the Ledger Sheets 

As a safeguard to the ledger sheets, each sheet may be 
numbered. A bank officer may have charge of all ledger 
sheets and new signatures, and make a record of each sheet 
number when it is issued to the bookkeeper. When a cus- 
tomer's ledger sheet is filled, the bookkeeper must turn it in 
to him and a new one is issued to take its place. This plan 
overcomes any possible objection to loose leaf ledgers and 
avoids the possibility of substitution of ledger leaves. 

p The Bookkeeping Machine for Bank Statements 

I Banks all over the country have discontinued balancing 
customers' pass books, sending out a monthly statement in- 
stead. 

The statement system eliminates the month end conges- 
tion, due to writing up of pass books, because the work of 
making statements is distributed through every day in the 
month. 

A great deal of interest has developed in the statement 
plan as applied to customers' accounts and the number of 



BANK ACCOUNTING 



318g 



users is constantly on the increase, because the balancing of 
pass books has always been a problem to bankers, and they 
are quick to appreciate a system which, besides saving time 
and expense, is in line of efficient service to customers. 

The First National Bank of Jamaica, New York City, 
whose form is shown, illustrates the method of handling state- 
ments under the daily posting method. The Statement 



r'"" 

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1 -.- -" N 


! s& 


•4£MSEt«- 


J.W.lloore 
E79 Broaflway Pt forth 


> :. t. Moor. 

J tT» Bro»4»*i 


"■ 


j « m ~Ss. m >X2r " *-5S The Fort Worth National Bank 


T "- t 




PROOP 






CHECKS 


DEPOSITS 


8ALANC3 








balance brought torwaro *»■ 


ajoji 5 3 5.4 5 


I AU3 J 1 




T 3 5.4 5 


IT 

sa» 1 
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♦,13 25 5 • 


1,13 35 5 


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CUSTODIERS MONTHLY STATEMENT MADE OUT OX A BURROUGHS 
LEDGER POSTING AND STATEMENT MACHINE 



Machine subtracts withdrawals as each individual check is 
listed, adds deposits, prints dates, and automatically marks 
balances and overdrafts. The statement form when finished 
is an exact duplicate of the ledger page. 

In some banks the checks are listed in vertical columns; 
while in others the paper carriage cross-tabulates automati- 
cally, listing the checks in three different spaces across the 
sheet. The machine is so constructed that it may be readily 
adjusted to handle the work either way. 

A daily balance may be secured by adding the old bal- 
ances and subtracting the new on all active accounts. The 



S18h THE PRACTICAL WORK OF A BANK 

difference must equal the difference between checks and de- 
posits for the day. For taking off old and new balances a 
special key can be set on the machine which causes it to alter- 
nately add and subtract. 

Before sending statements to customers the perforated 
margins are torn off and retained for analyzing the accounts 
or calculating interest on daily balances. The vouchers are 
counted and compared in number only with the sheets and 
wrapped. 



CHAPTER XI. 
CHECKS AND THEIR COLLECTION 

Through the disappearance of sectional lines and the 
knitting of the country together by the railroads, has come 
the growth of commerce, so that no section is now sufficient 
unto itself. The apples of Oregon are sold in New York; 
the fruit of California in Boston; and the shoes of Massa- 
chusetts in Texas. 

Trading is no longer confined to a neighborhood. Com- 
mercial transactions are largely between the principal cities,, 
and between smaller places and the principal cities. For 
instance, the trade between New York and St. Louis is 
large, and between St. Louis and the surrounding towns 
likewise large, every large city acting as a distributing cen- 
ter for the adjacent territory. Banking in turn follows the 
course of trade. The suburban merchant remits to his job- 
ber in the territorial distributing point, and he in turn to the 
house in the large city. The check which settles the debt 
follows or should follow approximately the same route as 
the trade, both in paying the debt and in the collection of 
the check itself, it being the function of banking to settle 
the debts trade creates. 

Domestic trade exchanges do not balance any more than 
foreign exchanges. The farming sections produce more 
than they consume. The crops in some sections are large, 
while in others small. Manufactured goods are exchanged 
for raw material and foodstuffs, section to section, but there 
is always a balance which has to be paid in cash. When the 
crops are being marketed, funds due Western banks pile 
up in the New York banks. But when the farmers need 
funds for planting and harvesting, these debts must be paid 
in money. The home bank gives the farmer credit for his 
wheat draft and itself gets credit in New York. By com- 
mon consent New York funds the country over are the 
basis of domestic exchange, for the reason that New York 
funds are desired everywhere, and generally are worth par 
or better. New York being our chief commercial city, the 
demands of business make it necessary that most banks have 

319 



820 THE PRACTICAL WORK OF A BANK 

a New York balance, and by virtue of this desire and even 
necessity of maintaining a New York account, New York 
has become the banking center of the country. 

Wherever commerce goes banking facilities must fol- 
low as a necessity, and the greater the trade, the greater the 
need for banking accommodations. The merchant in Texas 
who buys a lot of shoes from a Massachusetts manufac- 
turer pays by drawing his check on his local bank and 
sending to the seller, who must turn the check into money 
as soon as possible. The buyer might, but it is not likely 
that he will, purchase a New York or Boston draft (do- 
mestic exchange) from his local bank and forward this in 
payment; he is more apt to send his own check, for two 
reasons: First, because.it is the simplest and easiest way 
and costs him nothing in time or money; and secondly, be- 
cause until the check comes home for payment he will have 
the use of the amount represented thereby, it may be with 
interest. 

Checks Circulating Currency 

The check thus sent may be out for ten days or two 
weeks, passing from hand to hand; from bank to bank; 
settling debt after debt; providing reserve balances for 
various banks, and circulating to all intents and purposes 
as money, and answering the functions of money admirably, 
so long as conditions are normal. 

A check, however, is not money, and even though it may 
answer the purposes of money, must finally be redeemed in 
money, and back of it, therefore, must be a propor- 
tionate amount of money or suspension of payment results. 

Banking functions, particularly in connection with bank 
checks, are becoming better understood as the rank and file 
of the people become better versed in the ways of business. 
The use of the bank check is coming to be common ; its util- 
ity as a voucher, its convenience as a mode of payment, and 
its safety and cheapness as a form of remittance more fully 
appreciated as banking has expanded and new banks 
have been created. 

Growth of the Use of Bank Checks 

The use of bank checks has grown enormously of late 
years. With the multiplication of banks, so that every town 



CHECKS AND THEIR COLLECTION 321 

and hamlet has its local institution, encouraging people to 
open checking accounts, the use of the bank check has be- 
come almost as common as the use of paper money. With 
the growing use of checks as a form of circulating currency 
has come the development of the transit department, so that 
everywhere are to be found banks featuring their collection 
service. One large bank in Philadelphia has handled over 
a billion dollars in its transit department in the course of a 
single year. 

It is estimated that twenty years ago the amount out- 
standing in the form of collections was $25,000,000, repre- 
senting 3,800 banks. In 1902 4,600 banks had $50,000,000 
outstanding; while recent figures indicate that no less than 
$144,000,000 is in process of collection constantly. 

Defects in the Present System 

But in spite of the widespread use of checks and their 
many advantages as a circulating medium (checks being the 
almost perfect medium of the large and distant payments, 
as bank notes are the perfect medium of the small and local 
payments), they must be redeemed in money; they must 
be paid on demand. This demand often takes on a silent 
form through the clearing-house, and a "clearing-house run" 
may take place, as disastrous as a run over the counter. The 
bank must either redeem its checks in money or suspend. 

The trouble with the American currency system has 
been that heretofore there has been no way by which a bank 
could turn its assets into a circulating medium, to redeem 
the checks of its depositors when the usual reserve proved 
inadequate. The banking system that does not permit the 
resources of the bank to be turned into circulating credits to 
redeem check obligations is vitally defective. The de- 
posits being payable on demand, and this demand taking 
the form of bank checks, it becomes necessary either to 
carry large reserves or to have some way by which these 
demands can be satisfied by the issue of an instrument that 
will freely circulate when the bank check proves inadequate. 
In other words, checks must be redeemed in bank notes, 
created by turning commercial paper into bank notes; for 
checks being of non-uniform denomination and unknown 
outside their immediate circle can only pass as currency 



322 THE PRACTICAL WORK OF A BANK 

where well known and under normal conditions. The Fed- 
eral Reserve System will make this possible by its rediscount 
operations. 

Checks Defined 

A check is best defined as "a bill of exchange drawn on 
a bank and payable on demand." And as a bill of exchange 
it is subject to all the laws governing bills of exchange. 
Commentators on the laws of negotiable instruments usually 
give but little space to checks, treating them under the gen- 
eral classification of bills of exchange; although there are 
peculiarities surrounding checks that do not attend ordinary 
bills of exchange, and the law of bank checks is a study in 
itself. 

Like bills of exchange, checks are regarded as "Inland" 
and "Foreign," depending upon whether they are payable 
within the State or without. But for practical banking pur- 
poses a check payable outside the jurisdiction of the local 
clearing-house, or outside the city if such institution does 
not exist, is regarded as "foreign" — meaning the mails and 
the transit department must be used to make the collection. 

Bank Checks Classified 

Bank checks may be grouped into four classes: (a) 
Checks drawn on the bank in which they are deposited and 
which come in over the counter for deposit or for cashing, 
the latter consisting largely of "counter checks" and payroll 
checks — "own checks"; (b) checks drawn on banks in the 
same city and which will be paid through the clearing- 
house; (c) checks drawn on banks in the same city which 
do not belong to the clearing-house, or clear through 
members, and which must be presented for payment by 
messengers. These are not numerous even in a large city 
like New York, most banks preferring to make use of 
the clearing-house, although such items are yet- considerably 
in evidence; (d) foreign checks, consisting of checks drawn 
on other points and which must be collected through the 
mails. The latter class constitutes the "transit items," and 
the department handling these items is called the "Transit 
Department," and is to be distinguished from the "Collec- 
tion Department" which attempts to collect time and other 



CHECKS AND THEIR COLLECTION 323 

items. The collection service must be regarded as a matter 
of banking courtesy and not a fundamental element in bank- 
ing practice. The cost of running a well-conducted collec- 
tion department must necessarily be large and the fees fre- 
quently all too small to recompense the bank; but it has be- 
come such a common practice to deposit all notes, drafts, 
certificates of deposit, coupons, etc., with the bank for col- 
lection and credit that it has come to be looked upon as a 
part of the bank's regular work to make such collections, 
frequently without charge, although some banks so operate 
their collection department that a profit accrues through col- 
lection fees. Some transit departments are run at an ex- 
pected loss, this being recompensed through the profits on 
deposits attracted by transit facilities and low exchange 
rates. 

Compensating Balances 

Checks are generally credited as cash, although in the 
better managed banks depositors are not allowed to draw 
against uncollected funds. This is provided against by re- 
quiring a balance large enough to cover the uncollected 
items. Thus, if a merchant should deposit $5,000 daily 
and carry a balance of $15,000, allowing three days for 
collection, his account could be drawn against in the sum 
of $5,000 daily without drawing upon outstanding items; 
his checks of one day offsetting the collections of the same 
day. 

Where checks are credited at par, it is generally required 
that a compensating balance be carried. By compensating 
balance is meant a reciprocal arrangement by which a de- 
positor (bank or individual) agrees to keep a certain bal- 
ance free of interest as compensation to the bank for the loss 
which will accrue on collections. Thus, a bank in the Middle 
West might agree to keep with its New York correspondent 
a balance of $10,000 without interest; in return for which it 
would receive, say, $25,000 of transit items a month for col- 
lection at an agreed rate, the New York bank, of course, 
paying the charges which it might or might not collect from 
its depositors. The profit to the Western bank lies in the 
exchange charges which it will deduct when remitting to its 
New York correspondent, which would probably be more 
than the interest on the $10,000. Likewise if a bank in 



324 THE PRACTICAL WORK OF A BANK 

Albany sends to Philadelphia items on which the Philadel- 
phia bank loses, say, $10 a month, but earns $20 in in- 
terest on the balance of the Albany bank with it, it is a de- 
sirable connection. The analysis department must see that 
the balance is maintained as agreed. 

The Country Banker and His City Correspondent 

The country banker uses his reserve agent both as re- 
serve agent and as collecting agent, depositing his items 
both for credit and collection, the items so sent the reserve 
agent as soon as credited becoming part of his lawful re- 
serve. In the Federal Reserve System the item becomes 
reserve as soon as it is mailed. As soon as the letter is 
dispatched the country banker, therefore, regards the 
amount as added to his balance, unless other arrangements 
are made. The reserves that are so constituted are not re- 
serves, but simply items in course of collection. In the ag- 
gregate the total is enormous. It is much more satisfac- 
tory to the country banker to send all items to his reserve 
agent in bulk than to attempt collection himself. It is 
cheaper and involves much less labor. 

The transition that has been taking place in the collec- 
tion of checks is well illustrated by the experiences of a 
country bank in New York State. In the early nineties it 
acted as collecting agent for a number of New York banks, 
and daily received a large number of items on surrounding 
places, which it sent direct to the drawee banks, receiving 
payment either daily, weekly or semi-monthly, but remit- 
ting to the New York banks daily. In the course of time an 
aggressive campaign was waged by a bank in a reserve city 
for reserve accounts and by the volume of its business was 
enabled to quote most favorable terms. The result has been 
that the first mentioned bank no longer collects for the 
surrounding territory, but sends all its checks in one letter to 
the reserve city bank. The latter now gathers to itself prac- 
tically every check for a hundred miles around, and has 
made a feature of its collection service and favorable terms. 

To such a marked extent has this process been going on, 
that in Chicago one of the largest banks employing from 
600 to 700 men utilizes one-third of its force in its collection 
department. 



CHECKS AND THEIR COLLECTION 325 

There are certain cities which have specialized in collec- 
tions and have become transit centers. Large and progres- 
sive banks in these cities have well organized transit depart- 
ments, and by the breadth of scope and efficiency of service, 
and cheapness, have made their collections a feature. Al- 
bany, N. Y., is one; Chicago is another; Boston has become 
the center of New England collections; Philadelphia has 
taken a prominent place as a transit center by virtue of its 
liberal collection arrangements; Kansas City, by reason of 
its efficient clearing-house, has taken front rank as a col- 
lection center for a large territory; Baltimore and New 
Orleans are likewise important points. 

The Journey or a Bank Check 

Inasmuch as a check is not money but merely an order 
to pay money, it should be sent home for redemption in 
money by the shortest route and in the quickest time. Its 
quick redemption is the chief concern, and because of its 
short life it is, under ordinary conditions, an ideal currency. 
It expands and contracts as the needs of business require. 
If business is slack, the number of checks will be materially 
less, and likewise the volume. 

As a matter of fairness and good business policy, the 
banker is under obligation to reduce checks received from his 
depositors to available funds just as quickly as possible. 
Under the present system of collecting these items, bankers 
often resort to circuitous routing to evade high collection 
charges. Mr. Cannon in his work on clearing-houses gives 
this example: A check on Sag Harbor, N. Y., deposited in 
Hoboken, N. J., went from Hoboken to New York, New 
York to Boston, Boston to Tonawanda, Tonawanda to 
Albany, Albany to Port Jefferson, Port Jefferson to Far 
Rockaway, Far Rockaway to New York again, New York 
to Riverhead, Riverhead to Brooklyn, and finally from 
Brooklyn to Sag Harbor. Had it gone direct, it would 
have saved fifteen hundred miles in travel and the handling 
by nine different banks. 

Any indirect routing of checks to save exchange charges 
takes them out of their natural channel — sends them home 
by the longest route to avoid the cost of the ticket by the 
shortest way. A large department store in New York does 



326 THE PRACTICAL WORK OF A BANK 

its banking in Philadelphia. This might be due to several 
reasons, either a desire on the part of the merchant to build 
up the business of his own bank, or to save the cost of ex- 
change, which in New York he would have to pay and 
which in Philadelphia he may escape by reason of the 
clearing-house rules regarding collections. 

The Transit Department 

The transit department is a department of labor. The 
mill grinds continually. Every day is a busy day, as was 
the day before. It is a good barometer. When business is 
brisk, the transit items will be heavy; when slack, the work 
will be lighter. The stationery, postage, clerk hire, etc., an- 
nually amount to a goodly sum, and the problem is to 
make the department show a profit by charging for the ser- 
vice more than the service costs. This is the problem of 
exchange. Some banks work on the theory that they can 
afford to collect all checks gratis, provided a balance free 
of interest is carried large enough to provide a profit. 
Others, by clearing-house rules, must charge set fees. 

The total of the items sent out each night (nothing is 
held over) is charged to "transit account" in the general 
ledger (the individual banks having been charged with the 
various amounts) and when returns are received they are 
credited. The bank knows, therefore, how much is out- 
standing all the time in the mails. 

An exchange account is also opened, to which the ex- 
change it receives is credited and to which is charged the 
exchange paid for collections. This measures the profit or 
loss of the transit department, as this is the only source of 
profit the transit department can show. There is, of course, 
the profit indirectly earned through the ability of the bank 
to make cheap collections and, therefore, attract large re- 
ciprocal accounts. 

The term "transit item" is used to designate those items 
which are sent by banks to other banks for collection and 
credit, or collection and remittance, and which have been 
received as cash by the bank, as distinguished from the items 
received for collection which are not entered as cash and 
will not be until returns are received. 

They may also be known as "foreign items" as distin- 



CHECKS AND THEIR COLLECTION 327 

guished from "city items." But whatever the term, the 
proposition is the same ; that is, to turn the item into money 
or its acceptable substitute, a draft on the nearest reserve 
city, as soon as possible. In order to do this, banks have 
correspondents in all parts of the country, which collect 
items in a certain territory, and maintain reciprocal ar- 
rangements with each other. If the bank has no correspond- 
ent it selects one for the purpose. But large banks cover 
the country so generally with correspondents that it is not 
usual to have an item that cannot be collected quickly 
through the regular channel, unless there be some special 
need for hurry. This, of course, necessitates indirect rout- 
ing and, therefore, delay, and the problem of banking to-day 
is to get these items collected in the shortest time at the 
least expense. 

In building up a transit system, the bank makes an 
agreement with its correspondent to do this collecting for a 
stated rate of exchange charge, remitting as may be agreed 
upon; or there may be a mutual agreement, that in return 
for a balance maintained with it, the depositary bank will 
send all items in a certain territory at an agreed rate of ex- 
change as aforesaid. It is a case of one serving the other. 
We are now more concerned with the machinery than the 
terms of collection, but the test of a good transit man is his 
ability to make satisfactory connections that will result in 
profitable business in the transit department. In order to 
know where an item should go, should there be any doubt, 
there is kept a card record of correspondents, terms, aver- 
age balance, etc., for use in routing checks. 

A bank with wide connections will, therefore, receive a 
large number of transit items for collection in its territory. 
Thus a bank in Albany. might collect checks for all New 
York State, on agreement with a bank in San Francisco. 
And all the New York State items of the San Francisco 
bank would go to the Albany bank and from there be sent 
out to its correspondents all over New York State. If it had 
no correspondent in, let us say, Watertown, it would send 
the item to Syracuse or Oswego, the nearest point where 
it had a correspondent. It is obvious that the transit man 
must know the map. 

The Albany bank would credit the amount received and 
allow its San Francisco correspondent to check on it, or 

22 



328 THE PRACTICAL WORK OF A BANK 

remit to New York for credit of the San Francisco bank, 
the most likely course. Conversely, the Albany bank would 
send all its California items to the San Francisco bank for 
collection and remittance, and would receive in return the 
San Francisco bank's draft on New York. Payment in 
both cases would be made through New York (in New 
York funds) . 

Collection of Bank Checks 

Transit items may be collected in two ways: Direct, 
using correspondent banks as collecting agencies ; or through 
the medium of the clearing-house. The clearing-house sys- 
tem of collection contemplates dividing the country into 
zones, each zone to have as its focal point the reserve city of 
that zone. To collect an item, a bank would send it to the 
correspondent nearest the clearing-house in the reserve city 
that acted as the zone center for that district. The only 
additional machinery needed is the machinery in the clear- 
ing-house at the zone center. This system is best illustrated 
by a brief description of several clearing-house systems of 
clearing checks. 

The Boston Clearing-House collects checks on all New 
England points. The scheme adopted in 1899-1900 was 
that of a clearing-house foreign department — a country 
clearing-house — which should clear New England checks. 
Each bank, instead of mailing individual letters daily to its 
suburban correspondents, "lumps" its country checks and 
sends them to the clearing-house, where they are re-sorted 
and sent by the clearing-house to the banks on which they 
are drawn. Settlement is made through the regular clear- 
ing-house in two days, the time required for collection. 1 

As to the practical results of the Boston system, Charles 
A. Buggies, manager of the Boston Clearing-House, states: 
"The introduction of what we term our foreign department, 
for the collection of checks in New England, has worked a 
revolution in the transit department. It has reduced the 
cost of collection to seven cents per thousand dollars ; nine- 
ty-five per cent, of the collections are received within forty- 
eight hours. The system is entirely satisfactory as far as we 
can learn to both the city and the country banks." 

iSee Clearing House Chapter for more detailed description of the Boston 
Clearing Plan. 



CHECKS AND THEIR COLLECTION 329 

The Atlanta system of collecting transit items through 
the clearing-house was established in May, 1909, and is col- 
lecting transit items on Georgia, Florida and Alabama. Mr. 
J. G. Lester, manager of the transit department of the At- 
lanta Clearing-House, says: "We have found that the plan 
works admirably. I have found that it paid on three 
grounds; first, in clerical expenses: second, in postage and 
stationery; and third, by reason of consolidated business we 
get a cheaper rate of exchange. Then, too, our transit de- 
partment having nothing else to look after, gets more 
prompt returns and more satisfactory service." 

The Kansas City system of collecting through the 
clearing-house was installed during 1905, and collects from 
territory covering 682,810 square miles, which comprises 
this large middle Western section, including seven States — 
Colorado, Kansas, Missouri, New Mexico, Oklahoma, Texas 
and southern Nebraska. This clearing-house covers three 
and one-half times as much territory as the States of Penn- 
sylvania, New York, Ohio and Illinois, combined, and has 
5,600 banks in its district. As to the practical results at- 
tained by the Kansas City Clearing-House, Mr. Jerome 
Thralls, manager of the Kansas City Clearing-House, says : 
"The operation of our country clearing-house has reduced 
the cost of handling cash items in the territory covered by 
that department, over sixty per cent. The average time re- 
quired for returns has been reduced in parts of that terri- 
tory, over fifty per cent., and in the whole territory a re- 
duction of probably twenty-five per cent. We know from 
our own experience that the plan is a good one and will 
work satisfactorily in any city where there is sufficient vol- 
ume of country business to justify the establishment of such 
a department." 

The Kansas City Country Clearing-House does not in- 
terfere with the arrangements of the individual banks, where 
these are more profitable — it merely offers its members the 
additional facilities which it affords. As it charges a uni- 
form exchange rate of one-tenth of one per cent., which had 
previously averaged twentj^-five to thirty cents per $100, 
it follows that there are few cases where it does not pay 
to make use of the clearing-house. Its operating expenses 
are pro-rated monthly on the basis of the amount of busi- 
ness transacted by each bank. 



830 THE PRACTICAL WORK OF A BANK 

In New England country merchants who used to allow 
from two to six days for the return of their checks must 
now be prepared to meet them in forty-eight hours. Similar 
results have been obtained in Atlanta and other places. Any 
system that will so quickly reduce a deposit to available 
funds is of inestimable value, not only to the depositor, but 
to our banking system in general. 

Exchange Charges 

It was only about twenty years ago that the custom 
among banks was to receive checks and other items for col- 
lection only, crediting the proceeds when collected. The 
strife for reserve accounts led the city banks to accept and 
credit these items at par. The check had not yet received 
its growth as a national currency, the collection charges 
were not a burden, and the number of items relatively small 
The city bank then began paying exchange to the country 
bank, and collected the whole country at par. The country 
bank, therefore, did not pay exchange, but received it. So 
great did the problem become that clearing-houses took the 
matter up and passed stringent rules regarding collection 
of checks, placing a minimum rate on certain points, with 
discretionary charges on others, the result of which was to 
shift the burden to the last holder of the check. 

The growth of banks in number has brought about the 
growing use of country checks, so that they now pass 
through the banks by the hundred thousand. The volume 
of business in this country is upwards of four hundred and 
fifty thousand million dollars yearly, and by the rule that 
fully ninety per cent, of the business is done by check, it 
will be seen that these instruments play a vital part in the 
commercial transactions of the country. 

The ideal arrangement would be to have all checks cir- 
culate at par. But the country banker has become so wedded 
to his exchange profits (in some banks enough to pay part 
of the salaries and sometimes the dividends) that he steadily 
opposes any change that will deprive him of these profits, 
or any part of them, which are easily made and sure. To 
avoid the collection charge, indirect routing is resorted to, 
and instead of a check going by the shortest route it often 
goes by the longest, as has been illustrated. 



CHECKS AND THEIR COLLECTION 331 

Theoretically, the charge made by the country banker 
should only be sufficient to cover the expense of creating 
and maintaining a credit balance in the reserve city on 
which he draws. This expense would, in reality, never ex- 
ceed the cost of shipping currency to that city. Now the 
city banker pays the charge of the country banker, which 
charge to-day includes not only the cost of maintaining the 
balance in the reserve city, but a profit to the country bank- 
er as well. But to the country banker in most cases the 
cost of maintaining a credit balance in his reserve city is 
nothing, for his reserve bank in that city often not only col- 
lects the world for him at par, but also pays him interest 
on his balance. Thus we have the fallacy of the city banker 
paying the country banker for the exchange the city banker 
provides the country banker without cost. The city banker 
has the right to adopt any system that will relieve him of 
this injustice provided he does not merely shift the burden 
to another. 2 

Everybody tries to avoid the exchange charge. The mer- 
chant in the small town pays his bills by his check. The 
merchant in the larger place accepts it rather than lose a 
customer or invite controversy. The merchant in the small- 
er town could get a New York draft, but that would involve 
expense. The city dealer endeavors to shift the burden on 
the bank, and some banks stand it and even invite it. The 
city bank then tries to shift the burden by transit arrange- 
ments, and accepts the loss only in the hope that it may in- 
directly regain it. Thus items frequently pass through the 
place of payment two or three times because of this dodging 
of expense. 

The solution would seem to be through the clearing- 
house, for if it will operate in Kansas City, it will operate 
on a larger scale for the whole country. Clearing-house 
collection reduces the cost from one-half to two-thirds. This 
has been demonstrated. It does not deprive the country 
bank of its profits, and will work a saving in postage, labor 
and time to compensate for the loss by reason of cheaper 
rates. It is just and reasonable. The contrast between in- 
dividual collection and clearing-house collection is apparent. 

2A. E. Eyler, Union National Bank of Pittsburgh, in Pittsburgh-Cincinnati 
Debate of American Institute of Banking. 



332 THE PRACTICAL WORK OF A BANK 

Under the present system each day the country banker 
receives a letter containing checks on him from each of 
fifteen or twenty banks in a city. In remitting for these 
items he sends a draft to each bank that sent him a pack- 
age of checks. Each remittance costs him a two-cent stamp, 
an envelope, a letter head, a draft, and his clerk's time in 
handling the transaction. This is a fixed cost irrespective 
of the size of the remittance, so the charge on even the small- 
est remittance he makes must be at least sufficient to cover 
this cost. Under the clearing-house system the country 
banker will receive each day, from the clearing-house in the 
city, one letter, containing all the items drawn on his bank. 
In remitting for these he will use one letter head, one draft, 
one envelope, and one stamp, instead of from fifteen to 
twenty of each, as at present. The saving in these items and 
in clerk hire will certainly be to the advantage of the coun- 
try banker and, in all fairness, he should reduce his charges 
for making remittances. 

It will inflict no injustice on the country banker as the 
only reduction in his charges will be proportionate to the 
reduction in his expenses for making remittances. He ought 
to make this reduction, for any bank is in honor bound to 
serve its customers at a rate consistent with justice and fair 
dealing. A bank is an agent of society to add to its wel- 
fare; not to hinder it. Any bank that must maintain itself 
by exorbitant charges for its services has no warrant for its 
existence. 

The problem of the collection charge is not only to re- 
duce it, but to place it where it belongs. As now obtains, the 
charge falls upon the last holder, who cannot escape paying 
the tax. The drawee bank most assuredly deducts the ex- 
change charges from its remittance, and it is easier to place 
the burden upon the man who deposits the item in a bank 
than to collect from the drawer. The proper place for the 
levy of the tax would, therefore, seem to be from the man 
most accommodated, namely the drawer. His banking priv- 
ileges are worth something to him. The benefits of a bank 
account are not only worth the loss of interest, but the 
checking privilege is worth a small charge. But by com- 
mon consent the tax has been imposed upon the last holder, 
leaving it to him to make the adjustment in his prices, or 
taking the loss as an expense incident to doing business. 



CHECKS AND THEIR COLLECTION 333 

It is anticipated and hoped for in many quarters that 
eventually the Federal Reserve Banks will take over a large 
part of the collection of transit items for the whole country 
on a basis fair to all the interests involved. The Fed- 
eral Reserve Act empowers the Federal Banks to "receive 
on deposit at par from member banks or from Federal 
Reserve Banks checks and drafts drawn upon any of its de- 
positors, and when remitted by a Federal Reserve Bank, 
checks and drafts drawn by any depositor in any other Fed- 
eral Reserve Bank or member bank upon funds to the credit 
of said depositor in said reserve bank or member bank. 
Nothing herein contained shall be construed as prohibiting a 
member bank from charging its actual expense incurred in 
collecting and remitting funds, or for exchange sold to its 
patrons. The Federal Reserve Board shall, by rule, fix the 
charges to be collected by the member banks from its patrons 
whose checks are cleared through the Federal Reserve Bank 
and the charge which may be imposed for the service of 
clearing or collection rendered by the Federal Reserve Bank. 
The Federal Reserve Board shall make and promulgate 
from time to time regulations governing the transfer of 
funds and charges therefor among Federal Reserve Banks 
and their branches, and may at its discretion exercise the 
functions of a clearing-house for such Federal Reserve 
Banks, or may designate a Federal Reserve Bank to exer- 
cise such functions, and may also require each such bank to 
exercise the functions of a clearing-house for its member 
banks." 

It will thus be seen that the intent is not to collect at 
par; but at the cost of collecting, and this is as it should be. 
The costs of collecting a check cannot be avoided, and these 
incidental expenses should be borne by those most benefited; 
but what arrangements will be made in this respect cannot 
at this writing be stated. But the intent of the law being 
plain, and the necessity being acknowledged, no doubt the 
Federal Board will evolve a plan that will meet the approval 
of the country as well as the city banker. 3 

s At the lime these pages go to press, the check clearing arrangements of 
the Federal Reserve Banks are being completed, and it is expected that before 
long the members of the Federal Reserve Banks will make the bulk of their 
clearings through this medium. It is yet too early to give any adequate descrip- 
tion of the clearing process. 



334 THE PRACTICAL WORK OF A BANK 

The Numerical Transit System 

The greatest development that has attended transits and 
collections in recent years is the Numerical Transit System, 
which has been in operation for about three years. The plan 
simply designates places and banks by numbers instead of 
names. Thus, instead of referring to the National City 
Bank of New York, either in correspondence or in conversa- 




TRANSIT ADDING MACHINE, BUILT SPECIALLY FOR TRANSIT WORK. USING THE NUMERICAL 

TRANSIT SYSTEM 

By courtesy Burroughs Adding Machine Co., Detroit, Mich. 



tion by name, the numerals "1-8" would be sufficient; mean- 
ing city No. 1, New York, and bank No. 8 in the clearing- 
house, which is the National City Bank. Thus, for every 
bank there is a number, and in listing checks the number 
which is on the face is all that is necessary to designate the 
city and the bank. 

Banks have readily taken to the idea as a time saver, 
and it is fast replacing the use of names. The saving in 



CHECKS AND THEIR COLLECTION 385 

time can readily be seen when to indicate the "Continental 
and Commercial National Bank of Chicago," two numerals 
are all that is necessary. The system of numbering was 
carefully designed by a committee of transit men represent- 
ing the American Bankers Association and is as follows: 

Numbers from one to forty-nine, inclusive, are used to 
designate the reserve cities, each city being provided with a 
number of its own to be used as a prefix in numbering the 
banks in these cities. The clearing-house numbers in each of 
the cities are used to designate the clearing-house banks and 
additional numbers provided for banks which have no clear- 
ing-house numbers. Numbers from fifty to ninety-nine, in- 
clusive, are used to designate States. The State numbers, 
are used as a prefix for numbering banks which are located 
outside of the forty-nine cities already provided for. In 
numbering the reserve cities Brooklyn is included with New 
York City; Kansas City, Ivans., with Kansas City, Mo., and 
South Omaha with Omaha. As there are fifty reserve cities 
this left two numbers not used. These numbers have been 
given Buffalo and Memphis. Buffalo was selected because 
it is the tenth city in population and by giving Buffalo a 
number of its own the clearing-house numbers can be used 
for Rochester, whose population is 218,000, the next largest 
city in the State. Memphis was selected owing to the scar- 
city of reserve cities in the South and on account of its im- 
portance as a collecting center and also to permit the use 
of clearing-house numbers for Nashville with a population 
of 110,000, the next largest city in the State and which is 
also an important collecting center. 

The forty-nine cities have been numbered, according to 
population as shown by the census of 1910, so that the larg- 
est cities have the small numbers. This plan reduces the 
labor of registering items in the transit department to a 
minimum as a large proportion of items are drawn on these 
cities. For example, a certain New York bank may be des- 
ignated 1-8, a Chicago bank 2-1, a Philadelphia bank 3-39. 
Thus every bank in the United States is assigned a distinc- 
tive number, the prefix denoting the geographical location 
and the second or affix number denoting the name of the 
bank. These numbers, read directly from the face of the 
check or endorsement stamp, are substituted for names and 
addresses in making transit or other records. The extent to 



B36 



THE PRACTICAL WORK OF A BANK 



which the numbers may thus be used is a matter for each 
individual bank to determine for itself, in accordance with 
its accounting system. It is imperative, however, that all 
checks, drafts and endorsement stamps should show the 
numbers so that every bank that cares to do so can make 












6-5 




Cleveland National Bank 








CLEVELAND, O 




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amount imnructum 












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X36836* « 




A TRANSIT LETTER MADE ON A BURROUGHS TRANSIT MACHINE 
Courtesy Burroughs Adding Machine Co., Detroit, Mich. 



use of this time and labor-saving system. It is obvious that 
every banker would wish to have his checks in such form 
that they may be conveniently handled by all other banks 
and it is expected that within a very short time every check 
in circulation will show the transit number of the paying 
bank. 



CHECKS AND THEIR COLLECTION 337 

By the use of individual numbers for the forty-nine cities 
the banks in forty-eight other cities can be designated by 
their clearing-house numbers. For instance, in New York 
State three cities have been given numbers of their own, 
namely, New York No. 1, Buffalo No. 10 and Albany No. 
29. The next city in the State, according to population, is 
Rochester, which it the first city numbered with the State 
prefix, which is number fifty. The Rochester banks are 
numbered 50-1, 50-2, etc. The system, therefore, permits 
the use of clearing-house numbers to designate banks in 
ninety-seven of the principal cities of the country. The 
Treasurer and Assistant Treasurers of the United States 
and the postoffices in the reserve cities have been given num- 
bers. Numbers have not been provided for express compa- 
nies, railroads or mercantile firms. If the clearing-houses 
in any of the forty-nine numbered cities wish to have addi- 
tional numbers supplied for express companies, railroads, 
etc., they can forward a list to the American Bankers Asso- 
ciation and the numbers can be provided. 

The State numbers have been divided into five sections 
as follows: 

Eastern 50 to 58 

South Eastern 60 to 69 

Central 70 to 79 

South Western 80 to 88 

Western 90 to 99 

The States containing the principal collecting centers, 
namely, New York, Pennsylvania, Illinois, Missouri and 
California, have been given the first numbers in their re- 
spective sections: 50-60-70-80-90, to facilitate the listing of 
items on the adding machine as only one key is used to print 
these numbers and also to indicate that the following nine 
numbers in each section represent the States in the same ter- 
ritory. Numbers 59 and 89 are left blank and can be used 
in the future should it become necessary to number the 
banks in our island possessions and Alaska. The system 
of numbering the States in groups according to territory 
should also prove to be of advantage in memorizing the 
State numbers. With the exception of five States represent- 
ing each section the States are numbered in alphabetical 
order in each section. 



338 



THE PRACTICAL WORK OF A BANK 



The numbers of the different cities and States are as 
follows : 





CITIES. 




STATES. 

New York 




I. 


New York City 


50. 




• 2. 


Chicago, 111. 


51. 


Connecticut 




3. 


Philadelphia, Pa. 


52. 


Maine 




4. 


St. Louis, Mo. 


53. 


Massachusetts 




5. 


Boston, Mass. 


54. 


New Hampshire 




6. 


Cleveland, O. 


55. 


New Jersey 




7. 


Baltimore, Md. 


56. 


Ohio 




8. 


Pittsburgh, Pa. 


57. 


Rhode Island 




9. 


Detroit, Mich. 


58. 


Vermont 




10. 


Buffalo, N. Y. 


59. 






11. 


- San Francisco, Cal. 


60. 


Pennsylvania 




12. 


Milwaukee, Wis. 


61. 


Alabama 




13. 


Cincinnati, O. 


62. 


Delaware 




14. 


New Orleans, La. 


63. 


Florida 




15. 


Washington, D. C. 


64. 


Georgia 




10. 


Los Angeles, Cal. 


65. 


Maryland 




17. 


Minneapolis, Minn. 


66. 


N. Carolina 




18. 


Kansas City, Mo. 


67. 


S. Carolina 




19. 


Seattle, Wash. 


68. 


Virginia 




20. 


Indianapolis, Ind. 


69. 


W. Virginia 




21. 


Louisville, Ky. 


70. 


Illinois 




22. 


St. Paul, Minn. 


71. 


Indiana 




23. 


Denver, Colo. 


72. 


Iowa 




24. 


Portland, Ore. 


73. 


Kentucky 




25. 


Columbus, O. 


74. 


Michigan 




26. 


Memphis, Tenn. 


75. 


Minnesota 




27. 


Omaha, Neb. 


76. 


Nebraska 




28. 


Spokane, Wash. 


77. 


N. Dakota 




29. 


Albany, N. Y. 


78. 


S. Dakota 




30. 


San Antonio, Tex. 


79. 


Wisconsin 




31. 


Salt Lake City, Utah. 


80. 


Missouri 




32. 


Dallas, Tex. 


81. 


Arkansas 




33. 


Des Moines, la. 


82. 


Colorado 




34. 


Tacoma, Wash. 


83. 


Kansas 




35. 


Houston, Tex. 


84. 


Louisiana 




36. 


St. Joseph, Mo. 


85. 


Mississippi 




37. 


Ft. Worth, Tex. 


86. 


Oklahoma 




38. 


Savannah, Ga. 


87. 


Tennessee 




39. 


Oklahoma City, Okla. 


88. 


Texas 




40. 


Wichita, Kans. 


89. 






41. 


Sioux City, la. 


90. 


California 




42. 


Pueblo, Colo. 


91. 


Arizona 




43. 


Lincoln, Neb. 


92. 


Idaho 




44. 


Topeka, Kans. 


93. 


Montana 




45. 


Dubuque, la. 


94. 


Nevada 




46. 


Galveston, Tex. 


95. 


New Mexico 




47. 


Cedar ictapids, la. 


. 96. 


Oregon 




48. 


Waco, Tex. 


97. 


Utah 




49. 


Muskogee, Okla. 


98. 
99. 


Washington 
Wyoming 





Numbers have been provided for all of the 2,200 banks in 
the forty-nine numbered cities and also in the forty-eight 
other cities showing the numbers for the first city in each 
State numbered with the State prefix. The remaining 25,000 



-i^a 



CHECKS AND THEIR COLLECTION 339 

banks of the country are to be numbered according to the 
following plan: The first numbers to be given to the banks 
in the largest cities and to be continued in the relative order 
of the population of the cities in each State. Each bank to 
be numbered in consecutive order according to seniority in 
each city. When there is only one bank in a town the banks 
are to be numbered in alphabetical order according to towns, 
the one bank towns to be numbered last. Blank numbers 
are to be left only in cities of 5,000 population and over. 



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THE EVOLUTION OF THE TRANSIT LETTER FIRST LINE SHOWS OLD METHOD OF RECORD- 
ING THE DETAILS ON A TRANSIT LETTER BY HAND SECOND LINE SHOWS THE 

SAME WORK BY MACHINE THIRD LINE SHOWS THE NUMERICAL TRANSIT SYSTEM 

AS OPERATED BY A TRANSIT MACHINE 

The blank numbers to be left as follows: Population of 
5,000 to 25,000, two blank numbers; 25,000 to 50,000, three 
blank numbers; 50,000 to 100,000, five blank numbers; 100,- 
000 and over, six blank numbers. 4 

The Transit Department in Operation 5 

The transit department is one of the most important 
departments of a bank, especially in the banks of large cities, 
and therefore it is absolutely necessary to have the best sys- 
tem possible for taking care of the many transactions that 
daily pass through that department. 

Assuming that most banks have the department so ar- 
ranged that it handles both incoming mail and outgoing 
items, that is, all items received as cash, it perhaps is well to 
give an idea as nearly as possible of how all such matters 
are handled and perhaps a better knowledge may be ob- 
tained by starting with the morning's mail and following 

4As described in pamphlet on "Clearing-Houses" issued by the American In- 
stitute of Banking. 

5 By Edward E. Schoeneck, of the Corn Exchange National Bank of Chicago, 
before Chicago chapter. By courtesy of the author. 



340 



THE PRACTICAL WORK OF A BANK 



the work from there on. Before going on with the subject 
it might be well to state that in order to have a thorough 
knowledge of all the work as outlined and for the bank's 
best interests the only way to handle the incoming mail and 
the collecting of transit items is to handle these in one de- 
partment. The clerks become more familiar with all ar- 
rangements and the correspondent banks will receive better 
service. 

After the mail arrives from the j)ostomce, where it usual- 




TRAXSIT TYPEWRITER WITH ADDING ATTACHMENT 
Courtesy Wahl Adding Machine Co., Chicago, 111. 



ly is received by a special messenger from each bank, it 
should be so arranged that it should then come under the 
supervision of the messenger department in charge of a head 
messenger, who should see to it that it is properly assorted 
by keeping out all personal letters. Then separate large and 
small letters, which, in turn, will be delivered to the transit 
department. All large letters or letters with many items, 
should be taken care of first, then follow with the miscella- 
neous small ones. Clerks should be especially trained to sort 
this mail after it is opened by the messenger department and 
here is where the transit department steps in and assumes 
its part of the work. 



CHECKS AND THEIR COLLECTION 



311 



It requires close attention to these letters, and where the 
bank has a large amount of mail daily, the same must be 
assorted carefully and correctly by the clerks in the transit 
department, so that it will be received in a prompt manner 
by the collection department, discount department, transfer 
of funds, shipments of currency, remittances for credit of 
correspondent banks and returns for items sent from the 
transit department, etc. 

These clerks should be educated to know the country ac- 
counts, so that when sorting the mail, they are able to pass 
upon it intelligently, but all matters of doubt should be re- 
ferred to the head of the department and he or his first as- 
sistant, should see to it, that all letters which contain items 
on which exchange must be charged, should receive the prop- 
er attention and a debit ticket should be made for all 
charges. The debit tickets should be handed to clerks that 
advise the credits and they should advise the amount so 
charged, checking each debit with the letter on which the 
exchange is charged, then at the close of business each day, 
the total amount of debit tickets can be credited to the ex- 
change account. It facilitates bookkeeping to charge the ex- 
change by ticket instead of deducting it from each letter 
and the correspondent banks can check their statements 
without trouble. Some banks prefer to have a monthly state- 
ment of their charges and this can easily be taken care of 
by having a certain clerk look after such arrangements. 

As soon as each assorter has a number of cash remit- 
tances ready, they should be delivered to clerks to check, and 
these clerks should so mark their letters that as few figures 
as are necessary will have to be used by the clerk that 
has charge of what may be termed the in-mail box. For 
example, one letter may contain a mixed lot of checks, say 
five or ten on New York City, ten or more on Chicago, and 
perhaps a few outside checks, some currency or coupons, and 
also city cash collections. To illustrate this further a chart 
is given which gives the idea more clearly: 



n. y 

c. h 

Tran 

Col 

Cy or Coupons, 
Total .., 



342 



THE PRACTICAL WORK OF A BANK 



This can either be arranged by having a stamp made to 
put on each cash letter as it is handled by the checker, or a 
small slip attached to each letter, will answer the purpose. 
Each checker can make up the totals by first running the 
amounts on an adding machine, then transfer them to this 
"make-up" slip for the convenience of the clerk that has 
charge of the "in-mail" book. It is well to have your cor- 
respondents so instructed wherever possible that they will 



THE NATIONAL BANK OF THE REPUBLIC. 

CAPITAL $2,000,000. SURPLUS AND UNDIVIDED PROFITS $1,000,000 

NATIONAL CITY BANK CHICAGO MAY 20 07 

NEW YORK N Y 



PROTEST ALL ITEMS PO AND OVER VNLBSS OTHERWISE INSTRUCTED. 
WIRE NON-PAYMENT OP ITEMS $200 OR OVER. 
SURRENDER DOCUMENTS ATTAC.-IED ON PAYMENT ONLY. 



\7e enclose the folio-wing items for collection and oredit, 

Yours very truly, 

B. M. MoKTNNEY, Cashier. 



IMP & TRADERS i NAT BK 

2ND NAT BK 

UNION EXCH BK 

NAT BK COM 

NAT PARK BK 

IMP & TRADERS NAT BK 

NAT BK COM 

UNION BK BROOKLYN 

NAT 3K COM 
NAT CITY BK, 
IMP & TRADERS NAT 



SPECIMEN 



2 


000 


00 


30 


000 


00 


12 500 


00 


3 


200 


00 


1 


078 90 


2 


500 


00 


2 


119 45 


1 


615 17 


10 


000 


00 


1 


568 


00 


2 


020 


41 


68 601 


93 



ILL SEWING WACH CO 
M PHILIPSBORN 



G WACKENREUTER 

STEER IN MAYER & CO 

PACIFIC COAST BORAX CO 

NAT WASHBOARD CO 

13 N W TR & SAFE SEATTLE 

CHG PNEU TOOL CO 

J V FARWELL CO 



TRANSIT LETTER THE NAMES OF THE BANKS IN THE COLUMN AT THE LEFT WOULD, 

UNDER THE NUMERICAL TRANSIT SYSTEM, BE DESIGNATED 3IERELY BY NUMBERS 

THUS "1-54" WOULD INDICATE THE NATIONAL PARK BANK IN THE FIFTH LINE 



separate their items, i. e., the clearing-house checks and the 
out-of-town items, so that when the remittances are received, 
all that is necessary is to put the total on each package, 
charge to the proper department and they are obliged to 
prove all such packages. After the packages are proven, 
then take a recapitulation of the package totals and this will 
tell if they have been run off correctly. A machine is now 
on the market which assists in proving the packages by hav- 
ing the grand total ready when the last package has been 
proven. 

As the "in-mail" book takes all the cash remittances after 



CHECKS AND THEIR COLLECTION 



3*3 



they have been checked by the checkers this work is best 
illustrated by the form as follows : 



Debit 



C.H. 

Singles 


C. H. New 
Packages York 


Transit 
Singles 

Credit 


Transit 
Packages 


Note 
Teller 


Gen'l 
Bks. 


Nat. Bks. Nat. Bks. 
A. to K. L. to Z. 


Bk. & Bkrs. 
A. to K. 


Bk. & Bkrs. 
L. to Z. 


Dfts. Exch. 



The "in-mail" work should be balanced according to lots 
or batches, say any number one to five or more, which would 
enable you to locate a difference in a very short time. After 
each department has balanced with this clerk, he then takes 
a trial balance and if the figures agree, slips can be filled out 
and the figures turned over to the note teller or transfer 
teller, as follows: 

Mail Debit. 
Date. 



Clearing House 

New York 

Remittances (transit) 
Remittances (transit) 

Note Teller 

Currency 

Coupons 

Total 



Mail Credit 
Date. 



General Books 

Nat'l Books A to K...... 

Nat'l Books L to K 

B. & B. Books A to K. . . 

B. & B. Books L to Z 

Country Individual Accts. 

Drafts 

Exchange 

Total 



In transit departments where both incoming and out- 
going mail is handled, there should be clerks to handle all 
cash "charge-up" items returned unpaid, transfers to New 
York and other cities, advising shipments of currency, as 
well as remittances to banks for items received for collection 
from banks that have no regular account on the books. 



23 



344 



THE PRACTICAL WORK OF A BANK 



These clerks can arrange to advise all credits received from 
correspondents, after they have been entered on the books 
by each bookkeeper who receives the credits from the "in- 
mail" book previously mentioned. 

It is necessary to have some kind of record of the terms 
with each correspondent bank, and a card with this informa- 
tion already printed on gives a clerk an idea of what to 
follow. After the account has been opened the information 
necessary can be added to that already on the card and on 
the reverse side a memorandum can be kept of special agree- 

UNION BANK & TRUST CO. 

m. , , ifl — ,. 



DearSir: 





ON WHOM DRAWN 


AMOUNT 1 


1 










2 










8 










4 










6 










6 










7 










8 





















TRANSIT LETTER FOR CASH ITEMS CARBON AND PENCIL PROCESS 



ments, but all letters pertaining to these arrangements 
should be kept in a special file for that purpose. It is also 
well to know what your correspondent banks are charging 
and a card with the itemized rates will be found useful. In 
fact, the card system has been found a most important part 
in the keeping of records in a transit department and is re- 
ferred to frequently. This does away with trying to keep 
records with too many different clerks or in books where 
the information is not always readily accessible. 

In most large banks it is so arranged that a certain clerk 
is given charge and perhaps is called the manager. He must 
see to it that the work is divided among his many assistants 
so that no part of the book work is to be done by him; he 
should have the power of making terms for handling his 
items; must constantly be on the lookout for new arrange- 



CHECKS AND THEIR COLLECTION 345 

merits that would benefit the bank; must arrange for the par 
points to be given to the bank's correspondents; must see 
that all large items are given special attention and especially 
cost items, and must endeavor to obtain special rates on the 
same. He must also educate his assistants to handle this 
part of his work and must have at least one clerk who may 
be called his first assistant, trained so that the work of the 
bank or department will not be dependent upon one person 
only. .This rule should be applied to each and every mem- 
ber of the department and each clerk should have a set of 
rules or instructions pertaining to his work, so that a change 
can be made at any time without inconvenience. 

The foregoing gives an idea of the general routine of the 
work before we take up that part of the department which 
will now be outlined after the ' 'in-mail" clerk sorts his tran- 
sit items. You will notice on a previous chart that they are 
listed so that the packages are in one column, singles in 
another. 

In the department there should be a clerk called 
"scratcher" man, who receives these items from the mail 
book and after listing the packages they are proven as pre- 
viously stated and as each package is ready, it is delivered to 
the "head router" and it is here where a most important part 
of the work of the handling of the outgoing items com- 
mences. The manager of the department should arrange it 
for this clerk so that he can assort his items in the best 
manner possible; and while some banks arrange the sorting 
of their items by lists, a very good way is to copy the lists 
of your correspondents into a book, using a bankers' direc- 
tory specially made for that purpose and by this method it 
does away with having to look after too many records per- 
haps kept in different places. When obtaining lists from 
your correspondent banks, you should ascertain what points 
are handled direct by them and what indirectly and this in- 
formation should show in the book mentioned. You agree 
upon certain marks for a "direct" point and when not 
marked the point will be considered "indirect." When re- 
ferring to this book you will readily find whether it would 
be to the bank's interest to route indirectly a very large item, 
and it perhaps would be well to give instructions to the head 
router not to send items in that manner when over a certain 
amount. New lists should be received from your corre- 



346 THE PRACTICAL WORK OF A BANK 

spondents at certain intervals, so that the records would be 
up to date. 

The head router should have a desk or table so arranged 
that the items could be assorted in different boxes and he 
should Jiave sufficient time to enable him to assort his items 
correctly. 

The work should be arranged in sets, so that, for exam- 
ple, all items that go to correspondents in large cities where 
accounts are kept are in charge of a clerk and the work, 
which is of sufficient quantity, will indicate that large letters 
are necessary. This work can be done on machines which 
are specially built for that purpose, such as a Remington 
typewriter machine with Wahl adding attachment, Elhott- 
Fisher machine and others. The Burroughs Adding Ma- 
chine Company are advocating the handling of transit let- 
ters on their machine, by using the number system for en- 
dorsements and the number system for the drawee, for items 
on banks in large cities, i. e., large letters. 

It is well to have the work so arranged that each clerk 
receiving a certain amount of items is charged with that to- 
tal, so that he can balance his work independently of anoth- 
er. This can be arranged according to the amount of work 
each bank handles and if the volume of business is large, the 
work can be so fixed that one or more States can be divided 
according to the amount of business on each State, and this 
will assist the head router in knowing just where to sort his 
items. The items are assorted according to the town by the 
alphabet by some banks, but this can be worked out very 
easily according to the way each bank prefers. This ap- 
plies principally to that part of the items for which the 
banks remit by draft. All "charge up" items can be assort- 
ed to clerks who have accounts that allow banks to charge 
items to their accounts, and this can be divided by calling 
the divisions, say: "National charge up accounts," "Banks 
and bankers charge up accounts," and would be arranged in 
sets according to the number of bookkeepers in each bank. 
These can be run on books of small letters which are carbon 
copy, say twenty letters or more to each page, using a num- 
ber for banks that remit for items and for all small "charge- 
up" letters of same size it is not absolutely necessary to have 
the number system, the date being sufficient in tracing an 
acknowledgment. 



CHECKS AND THEIR COLLECTION 347 

All "large" letters that banks allow to be charged to 
their account can be handled on the large machine sheets 
just mentioned. 

After receiving his checks each clerk should make a list 
of them on the adding machine before sorting them to 
charge to his correspondents on his set and keep adding to 
his list after he has assorted the first lot. The sum of all 
these lists must agree with the totals of the letters and he 
will know his work has been balanced each day. Then each 
clerk should give the totals of his lists to a clerk in the de- 
partment who should have charge of what is called a "proof 
scratcher" and the sum of these lists on his scratcher should 
agree with the total amount charged to the other scratcher, 
which is a proof on the work received from the mail book 
and tellers. The "proof scratcher" should see to it that fig- 
ures are then turned over to the general bookkeeper repre- 
senting the total of the work handled in the department for 
the day. 

Some banks handle as cash a large amount of drafts with 
bills of lading attached. These are handled in the transit 
department and if the volume of business is sufficiently large, 
a special book can be used to record each draft, so that full 
costs can be recovered, i. e., exchange and interest for time 
drafts were outstanding over a certain number of days. 

All work in the department should be carbon copy. 
Many banks throughout the United States have their work 
so arranged that practically all of it is done by machines 
previously mentioned. 

Banks are continually on the watch for systems that 
will improve the work in this department and it is safe to 
say that there is no department in a bank that requires as 
many changes as the transit department, and usually the 
new innovations are an improvement, so that the department 
is bound to be one of the best in a bank, when properly man- 
aged. There was a time when the work was done by pen 
and ink and copied in a copy book. Registers were kept 
and in many instances banks kept a complete record of each 
check. The changes that have been made certainly are won- 
derful. 

The work of the transit clerk is best illustrated when you 
consider that he must see that his items are sent to the 
right correspondent ; he must see that the proper instructions 



348 THE PRACTICAL WORK OF A BANK 

are entered on his letter ; he must watch to see that all items 
are endorsed correctly. Some banks have clerks whose spe- 
cial duty it is to endorse the items. Some endorse them 
"Pay any bank or banker," etc., and many prefer to endorse 
them to the bank to which they are sent. The latter is the 
proper way and does away with the question of a qualified 
or restrictive endorsement. 

The transit clerks must also see that all items are paid 
or advised promptly, and if not, notify the customer; should 
balance his outstanding or unpaid items regularly and also 
trace those not accounted for, collect interest on overdue 
drafts and watch for other similar matters which may oc- 
cur from day to day. 

It is well to keep a record of the number of checks each 
transit man handles; this gives you a good idea of the 
amount of business transacted and the information proves 
very interesting from year to year. 

As each clerk should balance his work separately as pre- 
viously stated, a special book should be kept by the man- 
ager of the department or his assistant, of the amount each 
clerk has outstanding and the totals in such book should 
agree with the amount outstanding according to the total on 
the general books. 

Some banks have their work so arranged that when the 
letters are ready to be sent out, they are delivered to the 
messenger department and under the direction of the head 
messenger he has the clerks in his department handle the 
outgoing mail by allotting a certain number of letters of the 
alphabet to each man according to the volume of business. 
By this arrangement, they are able to enclose items from 
the different departments all in same envelope when in- 
tended for a certain bank, thereby saving quite a sum to the 
bank in postage, and at the same time have the mail in such 
shape so that it can be handled by the correspondents in a 
more satisfactory manner than if they were to receive prob- 
ably half a dozen or more letters from a bank daily, espe- 
cially where banks in large cities deal extensively with banks 
in other large cities. 



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CHAPTER XII. 
BANK EXAMINATIONS AND AUDITS 

The examination of a bank has for its purpose the deter- 
mination: (a) That the bank is solvent; (b) that it has, as 
it claims to have, assets of certain worth; (c) that its 
methods are clean and its management conservative and 
sound; (d) that the technique of its operation is efficient 
and modern, and to suggest changes in the system to make 
it a smooth running accounting machine. 

The examiner going from bank to bank acquires a fund 
of information that he can use to advantage, if the bank be 
in a receptive mood and is anxious to improve its service, 
and can advise the officers in many things to their profit. 

Frequently we see men overworked for no useful pur- 
pose ; doing things in the hardest way ; doing the same work 
twice when once should suffice; writing where a rubber 
stamp would be far better, and failing to appreciate the 
usefulness of the carbon sheet and other labor-saving de- 
vices that make for efficiency in the day's work. But such 
are the conditions in large and presumably well-managed 
banks that lay claim to aggressiveness. The author once 
had the pleasure of drawing up a plan to reduce the opera- 
tions from seven to four in handling mail items, only to 
find the Chinese wall — "We have always done it with seven, 
why four?" — in his way; and they do it with seven yet. In 
another case the deposits were listed on sheets each day and 
the entries on each sheet counted to record the number of 
items. And no one had ever thought of numbering the 
lines! 

Right to Examine, Police Power 

This right to examine is recognized as part of the police 
power of the State, for the good of all; and while in Eng- 
land there is no such thing as bank examinations, each bank 
being a law unto itself, such a condition here would lead to 
chaos in the banking world ; for we need the steadying hand 
of supervision to keep the ships off the rocks, even the little 
ones. 

349 



350 THE PRACTICAL WORK OF A BANK 

The ultimate end and aim of the examination is to pro- 
tect the stockholder and the depositor from losses due to 
unsound banking operations. The large stockholder needs 
protection from the directors and other stockholders, the 
little stockholder needs protection from the big stockhold- 
ers, the depositor needs protection from both, and the di- 
rectors need protection from themselves. 

While the law imposes a liability of twice the capital 
holdings, it is seldom if ever collected in full, and the pen- 
alty if enforced upon the little fellow would be difficult to 
recover; and even though it were not so, to protect him for 
his own sake is worth while. Many a stockholder invests 
with no thought of his risk, looking only to his dividends; 
and in his ignorance he should be assured of sound policies 
and solvent condition. It goes without saying that the de- 
positor needs, and is entitled to, all the protection that prop- 
er examining methods can give. 

Bank Examinations or Two Classes 

Bank examinations may be divided into two classes: (1) 
External examinations performed by the Comptroller of 
the Currency, State banking departments, clearing-houses 
and periodical audits by certified public accountants; and 
(2) internal examinations or audits made by the bank's 
auditing staff or public accountants. The latter is in the 
nature of an internal audit by an outside source, but the 
audit is by order of the bank and not by an independent 
supervising body. The most common form of internal audit 
is the examination by the directors — a bank examining 
itself. 

Checking the books of a bank does not warrant the 
solvency of the bank any more than checking the books of a 
mercantile house warrants profits. It is not an audit. The 
examination should be what the accountant would call an 
investigation; as if the books of the bank were destroyed, 
and the problem was to ascertain what the bank owned and 
what it owed independent of its records. And without using 
the books of record, except as a guide, a bank may be fully 
examined. 



EXAMINATIONS AND AUDITS 351 

Examinations by Directors 

It is reasonable to conclude and easy to prove that an 
audit of a bank cannot properly be made by a committee 
of directors. In the first place they do not know how, and 
are often coached by one of the bank's administrative heads ; 
secondly, they have not the time to do it properly, and as a 
rule verify the things that hardly need verifying, and over- 
look the things they should inquire into. 

With all the solemnity of a judge of the Supreme Court, 
they will come in, without warning, count the cash, call for 
the bonds, and perhaps look over the loans and discounts, 
and it may be verify the bank balances; but overlook the 
most important thing — the accounts with depositors. 

Some well -managed banks are now recognizing the fact 
that the board of directors cannot make a proper audit and 
so employ outside accountants for this purpose, and this is 
as it should be. 

An accounting firm of high standing submit the follow- 
ing as their conception of a true audit: 

First. We count the cash in detail at the date of our audit. 

Second. We submit a detailed report of all cash items which are being 
carried by the bank. 

Third. We verify the balances due, to and from other banks, by corre- 
spondence. 

Fourth. We submit a detailed list of all overdrawn accounts showing the 
date the overdraft commenced. 

Fifth. We verify all loans and submit a detailed statement of each borrow- 
er's, director's, officer's, and clerk's liability as maker and endorser. 

Sixth. We submit a detailed statement of all suspended or past due paper. 

Seventh. We verify all securities owned, by count of same. 

Eighth. We verify all deposits by trial balance of the ledgers, and we 
examine all pass-books presented during our stay at the bank. 

Ninth. We verify the outstanding capital stock by examining the stock 
records. 

Tenth. We place a sufficient force of accountants on the work so that our 
examination will be completed promptly. 

Eleventh. We submit a complete, detailed, typewritten report, covering our 
audit, and we include therein all suggestions for improving the accounting 
system. This report is addressed to the president, or to some one authorized by 
the board of directors. 

Twelfth. There are other features of our examination which we would not 
care to reveal, as they are safeguards which we employ to detect shortages or 
manipulations. 

Mr. E. P. Moxey of the Comptroller's office in Wash- 
ington tells this incident : 

"While preparing a bank case for trial I was much 
amused by reading, in the minutes of the meetings of the 



352 THE PRACTICAL WORK OF A BANK 

board of directors, a report of a committee of the board on 
the result of their examination of the bank. As far as 1 
recall the wording was somewhat to this effect: 'Your ex- 
amining committee begs leave to report as follows: We 
met at the banking house on Thursday last, after the close 
of business, and counted all the cash in the possession of the 
several tellers and that in the vaults of the bank, and found 
the same to agree with the amount called for by the books. 
We examined all the loans and discounts, with the collateral 
securing the same, also the stocks, bonds and securities 
owned by the bank and found the same to be correct. We 
also examined all the books and accounts of the bank, and 
found the same correct in every particular. The income and 
expense accounts for the past six months were carefully 
audited by us, and are correct. We completed our examina- 
tion and adjourned at six-thirty P. M.' 

"And the report might have added — 'in time for supper 
in the board room.' " 

What the Examiner Should Know 

The qualifications which must be possessed by anyone 
who wishes to be considered a competent bank examiner are : 

First — He must have a pleasing personality, tact and 
character. 

Second — He must be an accountant of experience. 

Third — He must have had business and banking train- 
ing. 

Fourth — He must be thoroughly versed in all the minute 
details of the banking business and know some of the ave- 
nues of fraud. 

Fifth — He must be well posted on financial subjects. 

Personality plays an important part in the qualities of 
the examiner. A certain gentleman creates a most unfavor- 
able impression while examining a bank, on account of an 
unfortunate trait in acting as though he considered every 
clerk in the institution a thief. As a consequence, and prop- 
erly so, he is thoroughly detested by them, and instead of re- 
ceiving their hearty cooperation in his work, every obstacle 
is thrown in his way to impede his progress. 

A thorough knowledge of accounts, not only those of 
financial institutions, but those of other lines as well, must 



EXAMINATIONS AND AUDITS 353 

be possessed by the competent bank examiner. This knowl- 
edge should be acquired preferably through experience, but 
the general principles on which all accounting rests may be 
acquired from those institutions which offer courses in higher 
accounting. The more experience a person has had in ac- 
counting work the better bank examiner he makes. 

Of course the most important thing that makes toward 
a competent bank examiner is a thorough familiarity with 
every detail of the banking business. Unless a man knows 
the various books and records used in each department of a 
bank it is impossible for him to make a proper examination. 

Not many years ago a leading member of Congress pre- 
vailed upon the then Comptroller of the Currency to ap- 
point as national bank examiner for his district a gentle- 
man whom he praised highly as being thoroughly qualified 
for the position. As a matter of fact that gentleman in 
question had never been inside of a bank in his life, except 
to make a deposit, draw a check or have a note discounted. 
It is needless to say that his examinations were mere farces, 
and the story goes, that the cashier of one of the banks he 
was trying to examine, out of the goodness of his heart, 
made out for him his report to the Comptroller. 1 

The examiner should not approach his examination as a 
detective looking for a criminal, but as a big-hearted indi- 
vidual looking for an opportunity to help; to give a clean 
bill of health if possible, but to discover the weaknesses if 
any exist; to build up by testing and not destroy by criti- 
cism. And if he goes at it aright, makes friends with the 
men, is dignified but agreeable, he can get much help from 
the force. 

The Psychology of Errors 

The knowledge that one's work is to be scrutinized tends 
to make one careful in that work. The exercise of care soon 
becomes a habit. And careful habits lead to efficiency. And 
efficiency leads to promotion and success. Errors are usual- 
ly the result of inefficiency. 

I have in mind a case of a large bank where the force of 
an entire department worked until late at night in the en- 
deavor to locate an error of $5,000 in the day's work. When 

iMr. E. P. Moxey before New York Chapter. 



354 THE PRACTICAL WORK OF A BANK 

this was finally discovered it proved to be an item for $5,000 
added to a remittance letter after the same had been footed 
without a corresponding change being made in the total. The 
person directly responsible for this error was a young fellow 
whose thoughts were not centered upon his work. 

Not all errors, however, are made unintentionally. There 
may be those who have been unfaithful to the trust reposed 
in them, and who have applied the funds and moneys of the 
bank to their own use. This stamp of man lives in constant 
dread of detection, for, by an unexpected examination of his 
books, should he be a clerk or bookkeeper; or by a verifica- 
tion of the securities owned by the institution or held by it as 
collateral for loans, of which he may be the custodian; or by 
a count of the money on hand, should he be a teller, he real- 
izes that detection is inevitable. 2 

An error known to exist should never be allowed to run 
long without locating it, unless certain that it is not the be- 
ginning of a trail. 

It is the examiner's duty to trace little things to their 
end and find out what they mean, for they may lead to 
serious developments. 

On a certain day in a large city bank the incoming mail 
department found at the close of the day's work a shortage 
of a few hundred dollars. The work of the day was checked 
and the auditor discovered that several checks of even 
amounts, as shown by the incoming, letters, had not been ac- 
counted for. He immediately secured complete descriptions 
of the items, and learned from the bank where they were 
payable that they had been paid two days later than the 
date of receipt. The next move was to check the day's work 
on which these items were actually paid, and the examina- 
tion brought out the fact that these checks had been inserted 
and other checks of the same amount taken out. The same 
process was then used in locating the checks of the second 
day, and the examination proved that this substitution was 
made every second day. This process was continued for a 
period of about two weeks. The party, then thinking he 
had covered his tracks so that tracing of the items was al- 
most impossible, drew several fictitious checks to the amount 
of the items already out, and drew them on a bank that it 

2Mr. Moxey. 



EXAMINATIONS AND AUDITS 355 

was customary for him to list in preparing the clearing- 
house exchanges. He then proceeded to open an account 
in a small out-of-town bank (this bank being a correspond- 
ent of the employing bank) , and when the checks were for- 
warded to their correspondent for payment, they were sub- 
stituted for the amount taken out two days before, and of 
course destroyed. 3 

How to Make an Examination 

The word assets comes from the French assez, meaning 
"enough," and the question to determine here as in the 
granting of credit is, "Is there enough?" The examination 
of the resources usually takes the larger part of the exam- 
iner's time, while little attention is given to the liabilities, 
which is no doubt due to the limited amount of time at his 
disposal. While proper attention should be given to the 
assets, as much, if not more thought should be given to 
the liabilities, for the individual ledger is probably one of the 
most fertile fields in which to detect wilful wrongdoing, and 
this usually receives the least attention from the bank exam- 
iner. 4 

In the small country banks, where the duplicate system 
is not in use, there is very little check on this portion of the 
work. The bookkeeper in charge of the ledger also balances 
the pass-books, so that he is in almost complete control of 
this particular portion of the work. 

The following directions for an audit, taken from a work 
on accounting over four hundred years old, are interesting, 
both for the language and the exactness of the procedure: 
"And for the more expedition and clearness, ye shall keep 
this order, which is that ye take and assign one of your fel- 
lows to help you ; for it were much labor and overtedious for 
one alone to examine all that belongeth to this act. Where- 
fore for the more speed, first deliver to your fellow the Jour- 
nall and hold yourself the ledger. Then request your fellow 
that hath the Journall to begin with the first parcel of said 

s Address before New York chapter. Author prefers not to be quoted. 

4An examiner of country-wide reputation stated to the author recently that 
he always examines the individual ledgers personally, for some of his greatest 
achievements as an examiner have resulted from clues which began with suspi- 
cious entries on the individual ledgers — particularly "kiting" operations. 



356 THE PRACTICAL WORK OF A BANK 

Journall, and that he tell you the name and the thing and in 
what leaf of the ledger it standeth, in debtor or creditor, so 
that you may perceive to what leaf he sendeth you. 

"And when you have found the parcel by the showing of 
him that hath the Journall, then mark and make a token in 
said ledger in the same parcel with a tick upon the amount, 
or some other sign so that it be no blemish in the book. That 
done, say to him that hath the Journall, that he also make a 
tick or sign of your concordance. And beware that none of 
you, without consent of the other, mark any parcel, by rea- 
son whereof might grow grievous labors to reform the cor- 
rection again of the same. For the parcels discreetly pe- 
rused and so marked, testifyeth a due examination. 

"Then proceed ye forth to your work and by examining 
your Journal and Ledger together of all the parcels both 
Debtors and Creditors by the which doing, thoroughly ex- 
amined ye shall perceive and find if your said ledger be per- 
fectly governed and compiled or not. And note you also 
that every one parcel in your Journall must for the concord- 
ance have two ticks, because it ought to accord with two 
parcels in your ledger, one in debit and the other in credit." 

As to the bookkeeping end, the first thing to do is to 
close the books and take a statement, so that a basis of 
reckoning may exist. Some banks, particularly savings 
banks, do not take a daily statement of the general ledger 
and the books would have to be closed to get this informa- 
tion. The examiner might use the ledger for this, but a 
statement from the ledger should be taken as a guide and 
also as a record of how the bank stood when the examination 
was made. 

Upon beginning the examination, the examiner places 
his seal on all vault compartments, so that substitutions and 
manipulations are impossible. If the securities are kept in 
another safe-deposit box or in another city, as frequently 
happens in the case of country banks which keep their bonds 
in New York or other large city, the sealing should be done 
by a representative. In New York, the Banking Depart- 
ment is communicated with and a representative of the de- 
partment seals the box wherever it may be. This of course 
requires credentials and such are furnished the one sealing. 
If securities are held in other banks on loan, for special de- 
posit, or other purpose, the holding bank is notified of the 



EXAMINATIONS AND AUDITS 857 

fact that the bank is under test and to hold the securities 
accordingly. 

Cash and Exchanges 

Cash is, of course, counted first, and it should all be 
brought to the examiner at one time and kept by him until 
verified. Packages may be verified first in bulk and then 
in detail, or vice versa. Ones and twos if in large volume 
are not counted except in bulk, or tests made to verify a 
package occasionally. No serious loss could come through 
such a medium and it is essential not to block the wheels by 
too many small details that lead nowhere. Gold and silver 
are sometimes verified by weight if the quantity is large. 

There is what is called in accounting "lapping," which 
consists in holding out from the cash items sufficient to 
cover a shortage so that the cash will show the balance called 
for. Thus, a teller might hold out enough deposit tickets at 
the end of the day to make good a shortage, since he would 
not have to account to the bank for the deposits until the 
next day, when he would hold out some more and so on. 
Such a process is, of course, difficult to check except by pass- 
ing the deposit through two hands, or substituting tellers so 
that such manipulations are difficult. 

After the cash has been carefully counted the matter of 
arranging for the verification of the exchanges should be 
taken up, in fact, these two items — cash and exchanges — 
should be taken up together if the force of examiners war- 
rants. In the clearing-house banks of New York City the 
following plan for the verification of exchanges has been 
worked out with splendid results. The examiner in charge 
of verifying exchanges takes off a list of the amounts due 
from each bank as they appear on the envelope about to be 
sent through the exchanges, placing in the envelope a request 
for verification of the amount, and seals the envelope with 
the seal of the banking department. Later the verification 
is sent to the examiner in charge of the metropolitan dis- 
trict by the receiving banks. 

Collateral Loans 

A list of the demand loans should then be made and the 
amount proved with the general ledger. This may be ac- 



358 THE PRACTICAL WORK OF A BANK 

complished by listing the amount shown on the several loan 
cards, and the total of such cards should prove with the 
amount shown on the daily proof. The cards should then 
be retained in the examiner's possession until the securities 
have all been verified. The collateral to these loans should 
then be examined and the securities checked with the record 
as shown on the loan cards. The market value of the col- 
lateral should also be checked to ascertain if the necessary 
twenty per cent, margin is in hand. 

If the examination is a thorough one, the amount of the 
loans and collateral pledged should be confirmed by the 
parties to whom the loans have been made. Defalcations 
have frequently occurred by the failure of the loan clerk to 
endorse partial payments, or amounts paid on loans, before 
they become due. The usual custom in such matters is to 
endorse the amount paid on the back of the note and credit 
the amount to the proper account through the note 
teller's department. If the loan clerk is so disposed, these 
payments may be easily kept from the records until the 
notes mature. 

One means of defalcation is for a loan clerk to withhold 
a portion of the securities pledged for a certain loan. For 
example, here is a loan to a customer for, say, $100,000, and 
the collateral deposited to secure such loan has a market 
value of $135,000, or a margin of thirty-five per cent. The 
loan clerk may account for $125,000 worth of these securi- 
ties and appropriate the balance of $10,000 to his own use. 
He has made a record of but $125,000, so that in the audi- 
tor's examination the securities in hand check with the cards. 
To guard against this, a blank should be sent to each bor- 
rower requesting him to give the amount of his loan and list 
of securities. 

The examiner does not display his hand, and so sends to 
borrowers a letter, enclosing statement of the loan and col- 
lateral, with instructions to verify and return, "to facilitate 
the audit of the bank." The letter might be addressed to 
the sending bank with the initials of the examiner in the 
corner, but the intent is to prevent it coming into the hands 
of any bank employee. 

The loans may be classified according to the books, or ac- 
cording to the examiner's notions into: (a) Collateral loans 
secured by stock exchange collateral, and those secured by 



EXAMINATIONS AND AUDITS 359 

other collateral; (b) loans secured by real estate; (c) single- 
name paper; (d) two-name paper. Further, if desired, into 
"own paper" (customers), and paper bought through 
brokers. The stock exchange loans will, therefore, be by 
themselves and can be quickly tested; while the other loans 
might need more attention. 

Loans secured by real estate should have the bond and 
mortgage properly recorded or assigned, insurance, title 
search or abstract, and appraisal by a committee or by an 
independent party. The value of the property is the essen- 
tial element here, real estate loans scarcely ever being made 
on the basis of moral or financial worth, the loan being based 
solely upon the property pledged, and a list once made in a 
bank carrying any such as a steady policy should be kept 
for future reference. 

Unsecured Loans 

Promissory notes, whether paper bought in the market, 
or home paper, must, of course, be dated, unmatured, 
properly executed, without alteration, and regular in every 
form. In the analysis of the loans the item of "Past Due" 
should be first taken up. 

A careful list should be made of the various items, giving 
in detail the date of the instrument, maker, all indorsements, 
due date, whether or not the note has been protested and 
the present status: that is, what the possibilities of the col- 
lection are, making a note at the same time of the name of 
the attorney if the item is in suit. 

The amount due from various parties, especially di- 
rectors, should be inquired into, and if the bank does not 
keep a liability book it should do so. The paper must be 
what it purports to be, and the parties good. Often the 
examiner will have a wide credit acquaintance, and know 
many of the makers of commercial paper. For instance, the 
name of a Chicago packing house would be known to every 
bank examiner and finding such paper he knows just how 
good it is. Local paper is best known to the directors and 
they should be called in and asked to pass upon paper oi 
that sort. As a rule the directors know nothing of outside 
firms selling paper through brokers and this appraisement 
can best be done by the examiner. Of course, if time per- 



360 THE PRACTICAL WORK OF A BANK 

mitted the statement of each borrower could be checked, but 
this would be a lengthy task. 

In order to keep tabs on borrowers all over New York 
State, and to ascertain the line they are carrying, the New 
York State Banking Department is now operating a credit 
bureau aimed to list every loan of $5,000 or more by name, 
the bank holding and the parties. This gives the depart- 
ment a check on large borrowers in every bank in the State. 
Borrowers have been found having borrowing accounts in 
thirty different banks. 

The bills discounted or bills purchased should be checked 
with the discount ticklers. The discount tickler is a record 
of the bills discounted assembled under the different dates in 
which they become due. As the notes themselves are filed in 
a cabinet in the same manner, the checking of the items to 
the tickler becomes a very simple matter. The total of these 
books, together with the past due notes, should correspond 
with the amount of bills discounted on the general ledger. 
All notes which have been forwarded for collection must be 
verified by correspondence, as well as all collateral held by 
other institutions. Totals made by adding machine should 
be proven, and no clerk allowed to make these lists. Noth- 
ing should be taken for granted. 

Government Moneys and Securities 

The receipts from the United States Government for 
bonds deposited to secure circulation and United States de- 
posits should be carefully checked. All United States bonds 
to secure circulation, United States and other bonds to se- 
cure United States deposits, must be deposited with the 
Treasurer at Washington, for which he issues a receipt. 
These securities must be verified by the receipt in possession 
of the bank. 

Due From Banks 

A list of the items composing the balance due from bants 
should be made and the amounts forwarded to the respective 
banks for verification. The account of "Due from United 
States Treasurer" is also verified and the amounts checked 
from the advices received from the Treasury at Washington. 



EXAMINATIONS AND AUDITS 361 

Verifying the Liabilities 

The liabilities of the bank should be verified with even 
more care than the assets, for these are easily under- 
stated. The capital stock of the bank may be verified by 
listing the outstanding stock certificates, and this may be 
readily accomplished if the cancelled certificates are fastened 
to the stub from which they were originally taken. 

The liabilities are best verified by correspondence or by 
cooperation with the creditors. But the main liability being 
on the deposit accounts it becomes very important that this 
liability be not understated. There is no way by which this 
can be done except by communication with the depositors in 
some way. In a savings bank this is done by examining 
the pass-books as they come in and calling them in. In 
Massachusetts all books are required to be presented once in 
three years for verification purposes and all banks advertise 
for books and in some cases verify as high as ninety-five per 
cent. But in a bank of discount the verification is not so 
easy a matter. 

In a majority of the larger banks the use of pass-books 
has been discarded, except as a receipt book for deposits, and 
statements similar to those used for correspondent banks 
have been substituted. This method is an improvement over 
the old one, as it enables a bank to have its accounts balanced 
each month and mailed to the respective customers from 
whom a report is usually received in a few days. These 
statements should be sent out and checked as to reconcilia- 
tion by the examiner. . 

If the old pass-book method obtains, the books may be 
sent for and written up. Depositors cannot verify their bal- 
ances without knowing what checks are unpaid, and, of 
course, vouchers must be returned with any statement of 
reconciliation. 

The correctness of balances due other banks may be veri- 
fied by statements rendered or received, which serve as the 
basis for reconcilement reports, disclosing the outstanding 
items of difference, which must be satisfactorily adjusted. 

The New York State Banking Department has desig- 
nated a man to handle the verification of these accounts and 
all data received by him from the examiners is used for this 



362 THE PRACTICAL WORK OF A BANK 

purpose. The result is a very thorough verification of this 
item. 

Items in the assets requiring careful analysis and verifica- 
tion are furniture and fixtures, accrued interest and suspense 
account. Very often there will be found charges to furni- 
ture and fixture account which are not proper items to be 
carried in the assets. Accrued interest will often be found to 
be a harbor for items which cannot be regarded as assets and 
the same may be said of suspense accounts. Loans have been 
charged off as uncollectible and the accrued interest on same 
still carried as an asset. It has also been found that the fur- 
niture and fixture account has been padded by charges for 
repairs and alterations to building. Accrued interest, furni- 
ture and fixtures and suspense account are too often accept- 
ed by an examiner at the book value. 

It is also important that a careful analysis of the assets 
should be made for the purpose of ascertaining the percen- 
tage of quick assets to deposits, or, in other words, what 
portion of the assets is readily available for liquidation of 
the deposits. 

The paid cashier's checks and certificates of deposit must 
be carefully checked and a proof made of the outstanding 
items. The usual custom of keeping the record of cashier's 
checks is to list all such items in a register provided for that 
purpose, giving the number of the check and the amount. 
The total of all cashier's checks issued is credited to such an 
account on the individual ledger, and when such items are 
paid, they are, of course, charged against this same account. 
The paid items are then checked off the register and the 
total of all open or unchecked amounts must correspond 
with the balance in the ledger. In some institutions each 
cashier's check has a stub attached which is removed by the 
officer who signs the voucher. All such stubs are forwarded 
to the auditor and the amount of checks issued is verified by 
means of such tickets. 

In a detailed audit care should be given the expense ac- 
count, and in auditing this account great care should be ob- 
served to see that every bill presented has been checked and 
initialed by the proper officer. A voucher must be kept for 
every item charged to this account to enable the examiner to 
readily check the amounts debited. All "overs" or "shorts" 
in the different departments must be promptly located by 



EXAMINATIONS AND AUDITS 363 

the auditor and the amount adjusted to guard against the 
possibility of a defalcation. The location of differences in 
the departments has been simplified by the installation of the 
sectional proof. The proofs enable the heads of departments 
to so divide their work that an error may be easily located. 

Clearing-House Examinations 

The clearing-house has come to be recognized more and 
more as a regulating force to make for good banking, as 
well as quick and expeditious banking; and clearing-house 
examination is a large step forward. 

The people have come to look to the clearing-house to 
keep banking sound; to eliminate the bad; sustain the good 
and protect all. For the good of all concerned there will 
come a time when all loans in the banks of a clearing-house 
district will be listed with the clearing-house, for the infor- 
mation of all members. Such a bureau is promised for the 
Federal Reserve Banks. 

It must be very embarrassing for a bank to find that it 
has loaned a firm up to the limit and another bank has done 
the same; when by an exchange of information both could 
have been warned. The banker who knows how much his 
borrower owes can make safe loans; the banker who does 
not, cannot. And the borrower who will not let his bank into 
these secrets had better be left alone. 

It was the Walsh bank failures in Chicago that resulted 
in the carrying out of the idea to have the banks that are 
members of the clearing-house association, and banking in- 
stitutions that enjoy clearing-house privileges, examined by 
examiners who were appointed by the association. The mat- 
ter had been talked of before the Walsh failures, but no 
definite action had been taken to inaugurate the work. The 
Chicago Clearing-House Association formulated the plan, 
created the department and the office in 1906, and in June 
of that year the plan became operative. 

Speaking of the plan and its operation, Mr. McDougal, 
the clearing-house bank examiner for Chicago, said: 

"Having from the clearing-house committee assurances 
that every f acility would be furnished to make the operations 
of the department successful, I was instructed to engage the 
necessary help, and to proceed upon my own judgment as to 



364 THE PRACTICAL WORK OF A BANK 

the details and manner of examination. General directions 
were given me by the committee to make such examinations 
as would enable me to give them a correct impression of the 
general condition of each bank as examined. As a matter of 
course, what the committee particularly wished to know was 
the general condition of each bank, the character of its assets, 
and the manner of conducting its current business. 

"After each examination a detailed report is prepared in 
duplicate, setting forth a description of the bank's assets, 
including all loans, either direct or indirect, to officers, di- 
rectors or employees of the bank, or to corporations in which 
they are interested, also describing the condition as found 
and the work done in every department. One of these re- 
ports is filed in the vaults of the clearing-house in custody 
of the examiner. The other is handed to the bank's presi- 
dent for the use of its directors. The individual directors 
are then notified that the examination has been made, and 
that a copy of the examiner's report has been handed to the 
president. By so doing every director is given opportunity 
to see the report and to cooperate in maintaining a high 
standard in his bank. The examiner has in every case insist- 
ed upon receiving acknowledgments of these notices to 
directors. 

"The detailed report referred to is not examined by the 
clearing-house committee, unless unusual conditions make it 
necessary. A special report is prepared and read before the 
clearing-house committee at meetings called for that pur- 
pose, expressing in general terms the examiner's opinion of 
the condition of each bank as he finds it, describing the gen- 
eral character of its assets and calling attention to any un- 
warranted conditions or gross irregularities, should they 
exist." 

Benefits Derived 

Among the benefits derived from these examinations the 
following have been named: "Mistakes of policy, as well as 
of judgment, have received timely correction; jealousies have 
been overcome; and suspicion and distrust, which not infre- 
quently exist among banks having no real knowledge of the 
condition of each other's affairs, have been supplanted by re- 
spect and confidence. Closer, more satisfactory, and perfect- 



EXAMINATIONS AND AUDITS S65 

ly harmonious relations have been established and are main- 
tained." 

In the extension of the idea of clearing-house examina- 
tions of the banks, the California Bankers Association has 
set an example for other State associations. It has divided 
the State into eleven sections, each of which is to have an ex- 
aminer. The Minnesota Association, or the individual 
groups, have done practically the same thing. In California 
one of the sections is San Francisco, and Los Angeles is 
another section. The remaining sections take in counties or 
portions of counties. At present clearing-house examina- 
tions are being conducted in St. Louis, Kansas City, Minne- 
apolis and St. Paul, etc., while in many other cities the sub- 
ject is being considered and many bank officials are very 
anxious to have the plan put into operation. 5 

Little Points for the Examiner 

The examiner should look particularly to little things. 
He should investigate any cash items that may be in the 
cash; check the petty cash fund; verify the day's exchanges 
and drafts sent out for collection; see that the last coupon is 
on all bonds. Mortgages should be properly recorded and 
taxes paid. Mortgage must not exceed the legal limits, 
usually sixty per cent, of the valuation of the property. Real 
estate owned should be evidenced by deeds, title policy and 
insurance should be in force. Overdrafts should not be of 
long standing. Liability of officers and directors should be 
investigated. Furniture and fixture account should not be 
excessively carried. See that no graft exists in renting the 
building. Banks sometimes give away offices — for a pur- 
pose. Check rents on bank building, and ascertain if any 
other money comes into the bank and is not made part of the 
accounting records. Such items as appraisals for real estate 
loans are often not made part of the bank's records. All 
cash that comes into the bank should be recorded, and then 
paid out by proper authority. Considerable opportunity 
exists in little things to do petty grafting. Dormant ac- 
counts should be investigated. Test interest calculations oc- 
casionally. Certificates of deposit long outstanding should 
be verified. Partial payments should be endorsed on the 

^Charles W. Reihl in The Bankers Magazine. 



366 THE PRACTICAL WORK OF A BANK 

stub, or better, old certificates should be cancelled and new 
ones issued. Verify cashier's checks in the same manner. 
Verify certifications. Verify margins on warehouse loans. 
Check back last published statement. Look over the minute 
book. See that it is properly kept. See if there are any 
excessive lines of credit. Are any advances made on the se- 
curity of the stock of the institution? Are the officers and 
clerks sufficiently bonded? Are meetings well attended? 
Does the bank earn what it claims to earn? Banks have been 
known to report impossible earnings. Are the premises 
properly protected, vaults and safes modern, and other safe- 
guards taken? Do the minutes provide for help without 
calling a special meeting of the board? Are the books al- 
ways in balance? Are shortages frequent? Are the officers 
careful about the little things of the bank? Are interest 
computations properly checked by another clerk? Are sup- 
plies safeguarded, such as pass-books and loose leaf sheets? 

To give a general idea of how a bank should be conduct- 
ed in regard to some matters, the Comptroller of the Cur- 
rency requires the following information : 

Directors — Opposite the name of each director enter 
full amount of all paper in bank upon which his name (in- 
dividual or firm) appears as maker, indorser, or guarantor, 
but where two or more directors are liable on the same paper, 
deduct from the total the duplicate liabilities, so as to show 
the net liabilities of all directors. Give the postoffice address 
of each director, his occupation and estimated worth and the 
number of shares held by him. State how often directors 
meet as board; whether they authorize or approve loans and 
discounts; in what form such approval is recorded; whether 
they have an active discount committee; whether they have 
an active examining committee ; whether loans and discounts 
to their firms and corporations are specially acted upon by 
the board; whether the records show the directors who ap- 
prove excessive loans. Ascertain, if possible, whether any 
director has become disqualified by hypothecation of stock; 
how often non-resident directors and officers meet with the 
board. 

Officers and Employees — State the liability of each as 
payer, endorser or guarantor of any paper held by the bank, 
the amount of salary, bond, and whether engaged in any 
other occupation. Give number, aggregate salaries, etc., of 



EXAMINATIONS AND AUDITS 367 

employees below the grade of teller and bookkeeper. State 
whether official bonds are in force ; in whose custody lodged ; 
who keeps the individual ledger ; who balances the pass-books 
and when last balanced; whether compared by some one 
else; whether any employee receives deposits and makes en- 
tries in the individual ledger; who keeps the general ledger; 
who reconciles bank balances; whether they are verified by 
some one else. 

Books and Accounts — State how often general ledger is 
balanced; what form of individual ledger is used, give forms 
of savings department and inactive ledgers; how often bal- 
anced; how often loans and discounts are verified; how often 
accounts with correspondent banks are reconciled; to what 
extent the envelope or statement system is used for depos- 
itors' accounts; how are certificates of deposit proved, and 
how often; how are paid certificates filed; are canceled cer- 
tificates and drafts properly filed; are pass-books balanced 
frequently and noted on ledger; are proper entries made in 
redemption fund and circulation accounts ? 

Loans and Discounts — The loans and discounts and 
other securities must be carefully verified and every dis- 
crepancy noted. Give the total amount of loans and dis- 
counts and list separately the amount of bad debts as de- 
fined in the National Bank Act and other overdue paper 
itemizing doubtful items and losses. Itemize the loans ex- 
ceeding the limit prescribed by the bank act, showing the 
names of the borrowers, the value of pledged securities and 
the financial standing of makers and indorsers. Give the 
name, amount and security of excessive lines of accommo- 
dation to one individual or interest, or affiliated individuals 
or interests. Include notes, bonds, stocks, and other forms 
of credit. If any portion of these lines constitutes an ex- 
cessive loan, it should also be shown. State general char- 
acter of loans; whether well distributed; general character 
of collaterals; whether corporations or enterprises in which 
directors or officers are interested borrow to an undue ex- 
tent; any large liability of director or officer as maker or 
indorser — describe fully. State whether all paper claimed 
by the bank as its property, including collateral, is properly 
indorsed or assigned to it, and all mortgages properly re- 
corded; give current rate of interest obtained. Itemize 
losses; does the bank place paper with other banks and to 



368 THE PRACTICAL WORK OF A BANK 

what extent; are they liable in any way; do they take loans 
to accommodate other banks and to what extent; is sending 
bank in any way liable; list loans secured by other national 
bank stock, when the borrower is an officer or director in 
the bank whose stock he puts up. Give list of doubtful 
paper other than previously itemized under past due and bad 
debts; include doubtful real estate paper. State the aggre- 
gate amount on which real estate security has been taken 
for debts previously contracted, and the amount on which 
real estate security has been taken in violation of law. Give 
the amount of real estate owned other than the banking 
house, listing separately the amount taken for debts previ- 
ously contracted and the amount acquired in violation of 
law. 

Bonds, Securities, etc. — Enter number of shares of stock 
or face value of bonds, and state whether bonds or stocks. 
Give name of corporation issuing stocks, bonds, etc., amount 
at which carried on books, estimated actual market value. 
State whether taken for "debts previously contracted," or 
otherwise, and if interest or dividends are not regularly paid, 
etc. Indicate those loaned or pledged in any way. If val- 
uable assets of this class are charged off, list them. 

Overdrafts — (Overdrafts are regarded as loans.) — 
State whether habitually granted and what amount is un- 
secured. Verify amount at date of examination and com- 
pare amount stated in last report of condition with amount 
shown by the books for same date. List those remaining in 
bank six months or longer. Itemize overdrafts of officers 
and directors and state whether habitual. 6 

Banking House — State whether suitable and convenient; 
for what other purpose used; whether carried at fair value 
on books; whether insured; if deed is in name of bank; 
whether vault and safe are good and secure; whether bank- 
ing room is used by any other banking institution; whether 
furniture and fixtures are worth book value; give assessed 
valuation and gross rental. 

Cash Items — Describe any irregular items and itemize 
losses estimated. 

Reserve — Is an exactly daily record kept of the different 
kinds of money on hand? (1) Is total reserve sufficient? 

6 By a recent ruling of the Comptroller overdrafts are forbidden. 



EXAMINATIONS AND AUDITS 369 

(2) Is reserve in bank sufficient? (3) Was the average re- 
serve for the last thirty days in the bank sufficient, if not, 
what was the percentage? (4) Was the average reserve for 
the last thirty days with agents sufficient; if not, what was 
the percentage? 

Capital Stock — State whether stock certificate book is 
properly kept; whether surrendered certificates are proper- 
ly assigned, cancelled and attached to stubs; whether any 
stock certificates are signed in blank; whether stock ledger 
is properly kept; whether amount of stock outstanding was 
verified; whether bank owns any shares of its own stock, 
and if so, how and when acquired; whether bank holds any 
shares of its own stock as collateral, and if so, how acquired. 

Affiliated Bank — (1) State whether there is an affilia- 
tion with any State bank, savings bank, or trust company 
through a controlling ownership of stock by the same share- 
holders, by practically the same management, or in any 
other manner, giving name of affiliated bank. (2) If trans- 
fer of certificates of stock of the national bank transfers 
ownership of stock of the affiliated bank, state that fact. (3) 
State whether stock of affiliated bank owned by sharehold- 
ers of national bank is held by them individually or as a cor- 
poration. ( 4 ) State whether stock of affiliated bank is trus- 
teed for benefit of shareholders of national bank. (5) State 
whether any director or other officer is an officer of any 
other bank. 

Dividends and Surplus — Give date of last dividend 
rate and amount and state whether semi-annual or other- 
wise; state amount carried to surplus. State reason, if any, 
why bank should not declare a dividend at end of current 
dividend period ; whether you compared bank's last report of 
earnings and dividends with the amount of profits shown by 
its books at same date; whether interest paid is deducted 
from gross earnings and whether any profits are irregularly 
carried on the individual ledger, in special accounts, or 
charged off the books. Is itemized expense account kept 
and did you examine that account to date of previous ex- 
amination? Did you examine earnings? 

Due from Reserve Agents, Trust Companies, Banks and 
Bankers — State what rate of interest received on balances 
and whether certificates of deposit issued by other national 
banks are secured by collateral. List reserve balances. 



370 THE PRACTICAL WORK OF A BANK 

Due to Reserve Agents, Trust Companies, Banks and 
Bankers — State whether amounts due are on open account 
or on demand or time certificates of deposit; whether they 
are secured by collaterals and rate of interest paid. (For- 
ward report promptly without awaiting verification.) List 
reserve balances. 

Individual Deposits — State rate of interest paid; wheth- 
er a proper record of all certificates of deposit, cashier's 
checks, and certified checks issued is regularly kept in a 
book for that purpose, and give rate of interest. If bank 
conducts "savings department," give method of verifying 
pass-books and rate of interest. State whether previous no- 
tice of deposit withdrawals are provided for. If bank holds 
State, county, municipal, insular possession, or any very 
large balances subject to check, give list and rate of inter- 
est paid. Give total of inactive ledger. State whether sur- 
rendered certificates are properly cancelled and filed in 
numerical order for auditing. State whether properly 
audited by this method. 

Rediscounts and Borrowed Money — List amounts of 
money borrowed, whether on bills payable, rediscounts, open 
accounts, certificates of deposit, bonds, or otherwise, and 
state where borrowed and date, interest rate, date of ma- 
turity, security, whether all liabilities are shown on books, 
whether authorized by the board of directors, whether bank 
borrows habitually. 

Recapitulation — Recapitulate the following resources, 
showing whether doubtful, or indicating loss. Give the esti- 
mate value of assets in each class not shown on the books. 
Bad debts, other overdue paper; all other loans and dis- 
counts, overdrafts, premiums on United States bonds, bonds, 
securities, etc., banking house, furniture and fixtures, other 
real estate, cash items. Show the total amount of surplus 
and profits less taxes, expenses, etc. 

General Remarks as to Condition of Bank — Summarize 
matters to which special attention should be called. Include 
certificate relative to solvency, by-laws, management, and 
condition of books. Was a meeting had with the board of 
directors? Were all matters subject to criticism considered 
with them? What elements of danger are in the bank? 7 

7 With acknowledgment to pamphlet on "Bank Accounting" issued by the 
American Institute of Banking. 



CHAPTER XIII. 

THE ESSENTIALS IN GRANTING CREDIT 

The Nature and Functions of Credit 

Credit is the life-blood of business, one of the "essential 
elements" in banking and finance. Without it, the present 
high state of business would not have come to pass, nor could 
it long continue. Credit constructs railroads, opens mines* 
spans rivers, paves streets, improves farms, builds homes, 
moves the commerce of the country and wages war. 
"Credit," says Webster, "has done more a thousand times 
to enrich the nations than all the mines in the world." 

Credit transfers large sums cheaply. It employs capi- 
tal productively. It enlarges a man's earning powers, and 
through its use the lender and borrower meet to their mu- 
tual profit. Credit is a far better instrument of production 
than an equal quantity of coined money; for while money is 
an indispensable denominator of prices, and the medium of 
the smaller exchanges, credit is the instrument of larger ex- 
changes, and larger production. Moreover, as an instru- 
ment, it is economically costless and not like money with a 
commodity value and expensive. 

Credit in Economics 

In political economy, credit is power to borrow; the 
ability to command capital. As nature abhors a vacuum* 
so capital abhors idleness, and it rapidly and automatically 
seeks profitable employment. Where the credit system is 
highly developed, active and profitable demand for capital 
exists. Where credit is undeveloped, we shall find business 
still in a crude state, wages small, and finances generally in 
an unsatisfactory condition. 

Credit in Law 

In law, credit is the present right to a future payment; 
the right to demand something from some one at a stated 

371 



372 THE PRACTICAL WORK OF A BANK 

time. Thus, when a bill of goods is sold, the legal title 
passes to the buyer, and the seller simply holds the right to 
collect the equivalent at the time and place appointed. He 
can retake the goods only under certain conditions, and his 
principal right is one of settlement. He can sell this right 
and the holder in due course will have good title to this right 
of enforcement. 

Credit in Business 

In banking and business, credit is the estimate of the 
ability and willingness of an individual, firm or corporation 
to meet their business engagements. This estimate was for- 
merly based chiefly upon: (1) Reputation; (2) capital. But 
with the advent of the mercantile agency and the credit de- 
partment, a more accurate and trustworthy basis of credit 
has been formed, thus: (a) A closer examination as to the 
character of the man and the business; (b) total net worth, 
the element of contingent liabilities being given due con- 
sideration; (c) other facts bearing upon the probability of 
the success or the failure of the enterprise. 

The basis of all such credit is confidence. In fact, every 
modern financial system is built upon confidence, and our 
whole financial structure has become a system of credit 
clearings — a system of substituting the token of confidence 
for the payment in money. This confidence must not only 
assure that a man is willing, but is also able to meet his en- 
gagements; not only able, but also willing. 1 

The Field or Credit Broad 

The field of credit is an inexhaustible one, and the last 
word has yet to be said. Like all other subjects, it has two 
sides — the theoretical and the practical. To apply the 
theory is as important, if not more so, than to understand it. 
Much has been said and written concerning credit in the 
abstract and much in the concrete, but the trouble has been 
that, as a rule, application has been made of broad rules and 
principles — so broad that their definite application has been 
difficult for the beginner to understand. 

3 From the "Essentials in Granting Credit" by the author. Awarded the 
Cannon Prize, New York Chapter, American Institute of Banking, September, 
1911. 



ESSENTIALS IN GRANTING CREDIT 



878 



Credit is no longer granted on mere personal acquaint- 
ance with the borrower and his business, but upon his state- 
ment of condition. The use of commercial paper as a bank 



INDIVIDUAL 

TO CITIZENS BANK OF BUFFALO 








For the purpose of procuring credit from time to time, borrowing money and obtaining discounts from you, the undersigned declare the.: 




.., ....191 , understanding that the officers of the bank in 'granting said credits rely upon the accuracy of 

this statement. 

If at any time the condition of the undersigned should be materially changed, notice will be given you immediately, in writing, stating the 
nature of such changed condition, and in the event of not doing so it shall be evidence that the condition is unchanged. 

If any judgment shall be entered against the undersigned or the undersigned should become financially embarrassed, all obligations of what- 
soever name, kind or nature held by you from the undersigned shall, at your option, be and become due immediately, notwithstand- 
ing the date of payment as fixed by the obligation then held by you. 

RESOURCES 
PERSONAL 


• 








| 










; 




























































REAL ESTATE 






























' 








































! 




1 




Total value of Real Estate. 






LIABILITIES 


























































• 






















Total Liabilities, 






Total worth in 


and out of business. 






If so, designate item and the amount. 
Please list real estate in detail on other side. 









CREDIT STATEMENT — INDIVIDUALS 



investment has become more common as its worth has be- 
come better known, so that to-day it forms a large part of 
the assets of our commercial banks. 



374 THE PRACTICAL WORK OF A BANK 

To properly judge the quality of the paper, dependence 
must be placed on the statement, and it is necessary to ana- 
lyze the statement of condition correctly. To do this re- 
quires experience. Here the theory is applied. And any 
bank man who expects to make safe loans must be able to 
judge a credit statement. It is not enough that the city 
correspondent recommends the paper — it, too, may be mis- 
taken in its opinion, or biased in its judgment. Nor is it 
enough that other banks have found it satisfactory, impor- 
tant as this may be as corroborative of present opinion. The 
banker should be able to do this for himself. 

Credit a Science 

In so far as the principles of credit have been worked 
out, systematized, clearly expressed and carefully applied, 
the granting of credit may be said to be a science. While 
not so exact as some sciences, such as mathematics, yet the 
fundamental principles are now generally recognized in all 
credit circles. Thus, it is accepted that character, capacity 
and capital are necessarily present in some degree in every 
credit operation; and while the proportion may differ, yet 
they must exist. To ascertain if they exist and in a safe 
degree is the work of the credit man. To determine the 
degree and the consequent safety of the loan based upon 
such analysis is to grant sound credit; to misjudge the qual- 
ity of the credit is to make unsound loans and invite loss. 

Credit is Old 

Credit is old — older perhaps than the instruments which 
represent credit. It is conceivable that primitive man trust- 
ed primitive man with goods, upon a promise to return or 
repay in kind or in value. The evidence would be parol and 
not documentary, but the element credo — to believe — was 
present nevertheless. 

Credit instruments are of sufficient age to prove the an- 
tiquity of even the documents of credit, there being in exist- 
ence at the present time perfectly preserved credit instru- 
ments dating back to 2500 B. C. 2 

2 In the Metropolitan Museum of Art in New York will be found Babylonian 
promissory notes on clay tablets, dating back to 2600 B. C, in a perfect state of 
preservation. 



ESSENTIALS IN GRANTING CREDIT 375 

Credit a Fine Piece of Mechanism 

Credit is a fine piece of mechanism. It works silently 
and smoothly most of the time ; but when it is thrown out of 
gear, it disrupts the whole commercial structure. Ordi- 
narily large sums are easily and cheaply transferred from 
place to place, country to country; enormous shipments of 
merchandise are bought and paid for, and the operations of 
trade and commerce move without a hitch; but once the 
credit system goes wrong, the whole fabric feels the shock. 

In the collapse of the credit machine due to the present 
war, new problems confronted the business world. It was 
necessary to devise other ways and means to promote credit 
transfers. The credit instruments in the hands of travellers, 
which ordinarily were accepted as cash everywhere because 
of the smooth working of the credit machine, were practi- 
cally worthless for ordinary purposes. Gold had to be sent 
abroad to redeem the instruments which, under normal con- 
ditions, transfers of credit would have accomplished. The 
established order of things had to give way to new ideas to 
meet new conditions. In this country new forms of bank- 
notes and clearing-house certificates appeared, based, not on 
gold, in whole or in part, but upon commercial paper. Thus 
credit was piled upon credit, to keep the wheels of industry 
from breaking down entirely. And it worked perfectly. 

Credit a Transfer 

Credit is a transfer — or rather it arises out of a trans- 
fer. All credit is based upon a transfer of property. With- 
out the interchange of property credit cannot exist. I may 
trust a man, but for what? My trust is merely good 
opinion. It is a compliment to him, but of no use until I 
trust him with something. Then it takes tangible form and 
out of the transfer true credit arises. I trust him to return 
the article or the value at the appointed time, and I have 
given him credit. I have confidence in him, and this con- 
fidence expressed in a transfer is credit. 

Credit depends upon an exchange and time. Something 
of value must be exchanged for a promise to pay at a time 
certain to arrive. If goods are sold for cash, no credit en- 
ters. Trust or confidence may arise as to the quality of the 



376 



THE PRACTICAL WORK OF A BANK 



goods, the weight or measure; but this is a different sort of 
credit than that we are dealing with. The payment must 
be deferred if the credit element is to enter. 



TO CITIZENS BANK OF BUFFALO 



Name {Firm style). 

Business* 

Location., 



.Branches. 



For the purpose of procuring credit from time to time, borrowing money and obtaining discounts from you, the Undersigned declare the 

following to be an accurate, true and full statement of the financial condition of the undersigned on- , . — — t 

^-™«« mTO «=-=^-o»^„„ U a..~.l9l« w =wn, understanding that the officers of the- bank in granting said credits rely upon the accuracy of 
this statement 

If at any time the condition of the undersigned should be materially changed, nob'ce will be given you immediately, in writing, stating the 
nature of such changed condition, and in the event of not doing so it shall be evidence that the condition is unchanged. 

if any judgment shall be entered against the undersigned or the undersigned should become financially embarrassed, all obligation* of what- 
soever name, kind or nature held by you from the undersigned shall, at your option, be and become due immediately, notwithstand- 
ing the date of payment as fixed by the obligation then held by you; 



ASSETS 








LIABILITIES 










...... 


'•■'- 


..... 


Bills Payable, for Merchandise.. .-. . . ,;„, ^w. 
Direct Loan from Citizens Bank of Buffalo.,.,.-,. .. 








Cash in Citizens Bank of Buffalo ...-, 


— 


•-- 


~" 


Bills Receivable from Customers, (good) ,„ 

Accounts Receivable from Customers, (good) 

Accounts and Bills Receivable, due' from Partners. . . 
Accounts and Bills Receivable, doubtful . , 


Bills Payable to others. ,. »^. ,„_^., v , 

Bills Receivable, disconnted.-.-w.*»-, ■■- » 

Open Accounts, not due. «.,, ..,...'„-,,,., 

Open Accounts, past due 


" 


. 


— 


~- 


— 




nis c o * e • "• •• ■••• 




— 


- — 






— ~ 


Money Deposited with us .- , . ..... . . ... 

ConfidentiaVLoans from Friends or Relatives, 
(and from whom) 




Real Estate in fee belonging to Firm 
Real Estate in fee belonging to Partners 









— 


„... 


1-1 
















"Ji ' 




— 












■■ l brz:::::;:;::::::::;::::::: 






Total Liabilities. .,.-.. „,.,,... 

Total. „.^, — „ . — ....... 


— 







liL 








.„.. 












Total. . ....... .-..».. . ..... .~_, . . «-.« 


,,.,.. 













Please list real estate in detail on other side. 

, Accommodations on Endorsements 

Contingent ) Guarantees on Bonds.. 
Liability j 

' Accommodation Paper Outstanding 
Do yau pledge, sell or otherwise dispose of any of yoiir accounts receivable 1 
If so, to what extent are any of the accounts in abovt statement so disposed of ? „ 

General Partners. _ s _~„..™.,.™ ,^,^-„„^E»-^»OT.. m . . M .. .iri ..»^» ■ « 

Date and Expiration of Partnership, ..^ - ™...~.^o»- .When was Business Established. 

Special Partners....„.„...^ mra T^.«..._ r , ■-,-.-. •■> For what Period and , 




Worth of Partners outside of Items scheduled above co- 
Sales for year ending ... 

Average terins of sale ...^.Amount of rent paid per annum. 

charged off for depreciation and bad debts — j — ■» 



.Date of trial balance 



Amount of .Insurance; On Stock ■- - — -- -««__^~ 

Are accounts insured, and ii, .so, in what Company ?„ 



. Machinery, and Fixtures c 



(OYER) 



CREDIT STATEMENT — FIBM 



In the eyes of the law a contract is a sacred thing. It 
surrounds a promise with all its powerful legal machinery, 
to protect the rights and enforce the liabilities of the parties. 



ESSENTIALS IN GRANTING CREDIT 377 

And credit instruments being contracts, find the strong arm 
of the law raised in their behalf, to enforce them according 
to their terms. 

Credit a Lawful Right 

Credit is a lawful right. If I have a negotiable instru- 
ment payable to me, I can sell this instrument, and thereby 
transfer my right to receive payment to another. This is 
called negotiation. And the element of transfer by indorse- 
ment, negotiability. If I sell a man a bill of goods on open 
account, I can sell this account, and vest in the buyer all 
my rights to collect from the debtor. In some cases the 
indorsee of a negotiable instrument will have better rights 
than the original party. Anything which I own I can sell. 
Credit, therefore, is bought and sold like other commodities 
because of its standing in law. 



Credit is Capital "■* <* ■* ; ^F* 3 * 



i «fe 



Credit is power to borrow. And the power to borrow is 
capital; therefore, credit is capital. It is reasonable to con- 
clude that if I have $10,000 in cash and can borrow $30,000 
more, the $30,000 is as effective for capital purposes as if it 
were all my own, except that the loan might be called at a 
time when not convenient to repay; but when employed it is 
capital in my hands. The industries of the world are car- 
ried on through borrowed capital — capital assembled in pri- 
vate hands and in banks, and then loaned to those who can 
best employ the assembled funds. And when in the bank 
the credit which the owner transfers to the bank becomes 
loanable in larger proportion, so that banking credit becomes 
capital to those who can offer necessary proof of character 
capacity and capital to employ the credit profitably. 3 

sThere is some dispute as to whether credit is or is not capital. It is at 
least equivalent, in its effect, to capital. While it may not increase the amount 
of capital, it transfers capital from one having idle funds to one who can use 
them at a price. It makes unproductive capital productive. And in the accept- 
ance form of credit, it does not even involve the use of funds, nor does the capi- 
tal fund need to be in existence when the credit is extended. Acceptance credit 
involves pure credit, and capital only remotely, and when so used, is capital. 



378 



THE PRACTICAL WORK OF A BANK 

Credit an Asset 



Credit is an asset. If I have a promise which I am rea- 
sonably sure of being fulfilled, I may contract other prom- 



CORPORATION 



TO CITIZENS BANK OF BUFFALO 



Name {Corporate style under charter). 

Business , , ._ 

Location , 



Branches.. 



undersigned declare* the 



For the purpose of procuring credit from time to time, borrowing money and obtaining discounts from you, I 

following to be an accurate, true and full statement of the financial condition of the undersigned on . 

„„..._ 191 , understanding that the officers of the bank in granting said credits rely upon the accuracy of 

this statement. 

If at any time the condition of the undersigned should be materially changed, notice will be given you immediately, in writing, stating the 
nature of such changed condition, and in the event of not doing so it shall be evidence that the condition is unchanged. 

If any judgment shall be entered against the undersigned or the undersigned should become financially embarrassed, all obligations of what- 
soever name, kind or nature held by you from the undersigned shall, at your option, be and become due immediately, notwithstand- 
ing the date of payment as fixed by the obligation then held by you. 

ASSETS LIABILITIES 



Cash on hand 

Cash in Citizens Bank of Buffalo 

Cash in other Banks 

Bills Receivable from Customers, (good) 

Accounts Receivable from Customers, (good) . 
Accounts and Bills Receivable, due from Officers. 

Accounts and Bills Receivable, doubtful 

Merchandise finished (how valued) 

Merchandise unfinished ( how valued) 

Raw material (how valued) 

Real Estate in name of Corporation 

(Market Value) 



Machinery and fixtures 

Balance due for stock subscription . 

Treasury stock 

Treasury bonds 

Good will and patents 



. Bills Payable, for Merchandise 

Direct Loan from Citizens Bank of Buffalo.. 

Direct Loan from other Banks 

Bills Payable to others 

Bills Receivable, discounted 

Open Accounts, not due 

Open Accounts, past due . . . 

Mortgage or Lien on Real Estate 

Chattel Mortgage or other Liens 

Bonded Debt 

Interest Due on Bonded Debt ; 

Money Deposited with us 



I:lf 



Total Liabilities 

Capital 

Surplus, including undivided profits. 

Total 



Accommodations 



Contingent 
Liability ' 



Guarantees on Bonds 

* Accommodation Paper Outs'., 

Sales for year ending 

Amount of rent paid per annum 

Do you pledge, sell or o"ierw ! .se d-> "se of r 

If so, to what eitent are any of the accounts : 

P7EAFF Rtv-s r^r.-r-rj 



Average terms ot sale. 



'.re recounts insured, and if so, in what Company? „ 

E receivable? , - -... 

• ' '• - J ,i=r,t>scd of ? -....- -.. _-._«- 



liL OF REAL ESTATE OWNED BY CORPORATION. 



DerrpUao 



Sfc 



Titje in Nam: ol Estimated Valu 



CREDIT STATEMENT— CORPORATION 



ises on the strength of receiving that which is due to me, in 
time to pay that which I owe. And in that confidence busi- 
ness moves. It is, when smoothly running, as effective to 



ESSENTIALS IN GRANTING CREDIT 379 

keep the wheels of commerce moving as gold; and its cost 
is cheaper. One dollar of credit will do the work of four in 
money, and do it just as well. It is intangible, yet tangible. 
It cannot be seen, yet is powerful. Like electricity, its force 
may be seen by its effectiveness. It is the "silent partner" 
of business. 

Credit is Reputation 

Credit is reputation. A man may have a very good 
name and yet have no credit, for credit is due to business 
character. And business character is simply reputation for 
promptness, square dealing, efficiency. It is not moral char- 
acter, however important that may be; for some men whose 
moral character is undoubtedly bad may have a high sense 
of business honesty and build up an enviable reputation in 
business circles. And on the contrary, a man may be ever so 
good, say long prayers and be however devout, and yet 
have no business reputation and, therefore, no credit. 

Credit is Willingness 

Credit is willingness to pay as agreed. It matters not 
how able a man may be, if he is not willing, he can circum- 
vent the law. He must have a desire to be honest, a willing- 
ness to be fair, a high regard for business ethics. The will- 
ing man will usually find a way or make one. It is vital 
that this element be in evidence in all credit transactions. 

Credit is Ability 

Credit is ability. Incompetency is the rock upon which 
many a business goes to ruin. It matters not how honest 
a man may be, if he lacks ability, he cannot succeed. He 
must "know how." The knowing how may be an inherent 
knowledge, or it may be acquired. It may be a knack, or 
it may be an accomplishment ; but the "know how" must 
be there, if the venture is to succeed. Many a business built 
up by long years of faithful work has been left in prime 
condition to a family only to be wrecked because the father's 
ability did not descend to the son, and the son could not see 
that it was necessary to develop ability or to buy it. 



380 



THE PRACTICAL WORK OF A BANK 

Credit is Resources 



Credit is resources. It is axiomatic that if a man would 
pay, he must have the wherewithal. He cannot pay a prom- 
ise with a promise — not for long; and unless back of the 



Incorporated under Laws ol... 

Authorised Capital 

How paid in, Cash — i 



_ Date.. 

,.Par value of shares .... 



Other property.. 



Description of other property, and how valued r — _ — 

What portion of real estate, if any, has been acquired through bad debts _.. 

In whose name is title to real estate held . Any mortgage against it _ 

Are stockholders liable beyond amount paid on stock If so, to what extent..... _ 

Average annual business t . , -- Annual expenses Annual dividends 

When was last dividend declared ... _ Rate 

Insurance carried on merchandise on machinery and fixtures on buildings.. 

Any mortgage on real estate, or other assets (give particulars) _ 

Bond issue when due Bate of interest 

Regular time of taking inventory .„ 

Oive basis of this statement, whether inventory or estimate 

What amount of accounts and bills receivable not charged off, is past due, extended or renewed— - *:..-. 

Amount charged off for bad debts last year Amount collected on bad debts during same period 

Do you charge off on plant annually _ How much last year _ 

State last date of taking Trial Balance ■„ _ _ r ..-_ ....How often taken _ 

Number of bank accounts and where kept „ _.._ _ _ 



OFFICERS NAMES IN FULL 


ADDRESS 


NUMBER OF SHARES 
HELD 













































DIRECTORS NAMES IN FULL 



Please sign Company's name here.. 



Date signed.. 



DETAILS OF CORPORATE AFFAIRS FOR CREDIT PURPOSES REVERSE OF PRECEDING FORM 

promise and the promisor there is property that will turn 
itself into money in due course, sound credit cannot arise. 
This property need not be in land and buildings, machinery 



ESSENTIALS IN GRANTING CREDIT 881 

and fixtures — some credit men prefer that it should not. It 
may be in rights to collect cash, merchandise, raw 
material and other forms of assets, but it must exist in 
some form, and that form preferably of quick convertibility, 
so that the debts which are of short duration may be met by 
credits of like duration, the one offsetting the other. 

Credit is Confidence 

Whatever credit is, it arises out of confidence — be- 
lief — that the debt will be paid; confidence that the trust 
will be fulfilled. No man parts with property unless he 
expects to get its equivalent at the appointed time. Even in 
collateral loans the credit is extended first on the faith in 
the borrower's ability to pay the loan, and this failing, in 
the confidence that the security will sell for enough to reim- 
burse the lender; so that it is confidence in both that under- 
lies the credit. In fact, most of the credit, particularly 
banking credit, is based upon the latter proposition; for 
back of the greater part of banking credit is value in some 
form. It may be stocks and bonds, warehouse receipts, 
grain, real estate, merchandise, "receivables," specifically 
pledged or not, to secure the loan: but upon faith of ulti- 
mate redemption in money the loan is made. 

In the granting of credit on open account, the confidence 
lies in the ability of the business to make money. And the 
likelihood of making money is based upon the condition of 
the business as expressed in cold facts. The ultimate secu- 
rity lies in the capital worth of the debtor, so that while 
credit is confidence, it is ultimately based upon value in some 
form. JuSt so soon as confidence in the property value is 
lost, credit is destroyed. Witness a war. As soon as the 
war clouds begin to gather, the people begin to curtail their 
credit — their confidence. They draw upon their bank ac- 
counts, preferring to hold metal to credit tokens. They are 
fearful that the credit token will not exchange for property, 
while money tokens will. They fear that the earning power 
of properties will be cut off, and with earning power goes 
interest and dividends. They therefore prefer certainty to 
credit, and the credit machine suffers. 

But credit is fundamentally confidence. Where confi- 
dence is most fully developed, credit will be cheap; where 



382 THE PRACTICAL WORK OF A BANK 

it is uncertain it is dear. When it is lost, credit is im- 
possible. 

The Psychology of Credit 

Expressed in simplest language, credit is, therefore, the 
belief that men will keep their engagements. It is confi- 
dence that the promise will be fulfilled. It matters not 
whether the promise is one of a government to pay a million 
dollars, or that of a laborer to pay the grocery bill he runs 
at the local store, the credit is extended upon the belief that 
the debt will be paid. 

The granting of credit is a psychological process — a 
mental gymnastic. From the facts submitted the credit 
man must determine the likelihood of the debt being paid. 
He weighs the pros and cons and makes his decision. He 
plays the role of the juryman, whose duty is to seek the 
truth and apply the law to the particular state of facts. 

He knows men. He knows business and business risks. 
He knows the customs of the trades. He knows the condi- 
tion of trade and the condition of trades at a particular time. 
It may be, for instance, that he has an application for credit 
from a suit and cloak firm. He will know if styles have 
suddenly changed, leaving manufacturers stranded with an 
avalanche of cancelled orders. He will know that a back- 
ward season has hurt sales. He will know that collections 
in certain sections are slow; in others good. In one part 
of the country crops may be good and money will be plen- 
tiful and cheap; in another dear. Just now he must weigh 
the probabilities of a great war. The collapse of the world's 
credit machine is a new force for him to reckon with. He 
must be a seer — one who sees; a prophet — one who looks 
ahead. How he gets his information is the secret of the 
profession. 

Mental Processes 

The credit man's risks are the outcome of his mental 
processes. He expresses his hopes and his fears by granting 
or withholding credit. He first gets his facts, then forms his 
conclusions, passes judgment and awaits the result. 

He may be influenced by friendship, pity, family ties, 
hesitance to say "no" — fear. He may be inexperienced in 
the ways of men and a poor judge of human nature. He 



ESSENTIALS IN GRANTING CREDIT 383 

may be reckless, or ambitious to build up a business or a 
bank, and extend credit to those unworthy. He may be a 
poor psychologist and prove a poor credit man; but what- 
ever the result of his labors, every credit is the result of men- 
tal conclusions, either carefully or carelessly formed. 

It may be mere hope that the borrower will pay; it may 
be knowledge that the borrower will, in all human probabil- 
ity, pay. And having come to the latter decision, he has 
done all that the occasion requires. If he has simply acted 
upon the former impulse, he has scarcely made a good be- 
ginning. And many a bank loan rests upon the insecure 
foundation of hope. 

All Men not Honest 

The mental exercise through which the lender goes be- 
fore credit is extended may be simple or complex, scientific 
or careless, but follows one of four general lines : 

(1) The belief that all men are honest, which isn't so. 
Any concern which extends accommodation upon the as- 
sumption that credit may be granted to all who ask, upon 
the broad proposition that the human race is imbued with 
inherent honesty and all men regard their word as good as 
their bond, and their debts sacred obligations to be met if 
humanly possible, will soon find its shelves empty, its bank 
account exhausted, and its books full. This, no doubt, is 
the reason for the many bankruptcies in the retail trades. 
The failures in general stores and dealers handling groceries, 
meats, fish, etc., amounted in number to over 4,300 in 1913 
with liabilities of over $28,000,000. Credit in such estab- 
lishments can be extended on no other basis than faith; for 
even a near-scientific method is quite impossible. 

Large mercantile houses and department stores, how- 
ever, operate credit departments which make an investiga- 
tion into the risk before opening a credit with a customer; 
but even this can go but little way to protect the creditor if 
the buyer is dishonest. And even with the utmost care and 
good judgment errors will be made and losses sustained. 
But in the smaller establishments credit is based upon per- 
sonal knowledge, often more or less casual, and the hope 
that the buyer is honest. 

Frequently payment is made promptly for a time in or- 



384 



THE PRACTICAL WORK OF A BANK 



der to establish credit relations, and gradually the account 
is built up until it assumes dangerous proportions and loss 
results. The retail grocers are subject to this experience 
most of all. Weekly or monthly bills are contracted and 
promptly met for a time. Then part of the amount due is 
paid, buying still continuing, small payments being made, 



Guaranty Trust Company of New York 

COMPARISON OF STATEMENTS 








ASSETS 














Cash on Hand and on Deposit 
































Notes Receivable 
Accounts Receivable 
Merchandise 


































Machinery and Fixtures 
Real Estate and Buildings 
Investments 
Prepaid Expenses 
Miscellaneous 


































Total 


































LIABILITIES 














Notes Payable 
Accounts Payable 
Moneys on Deposit with us 
Accrued Liabilities 
Dividends 
Miscellaneous 


































Mortgages on Real EstaU 
Bonds 


































Total Liabilities 
Net Worth 
Capital 

Surplus 
Reserves 


































Total 


































TOTAL QUICK ASSETS 
LIABILITIES 


































EXCESS^QUICK^^ 


































Annual Sales 
Contingent Liability 



































COMPARISON OF STATEMENTS 



until the debt grows larger instead of smaller, and often the 
debtor moves to parts unknown, leaving the dealer's profit, 
and sometimes his capital, on his books as a worthless 
account receivable. 

There is now a movement to register all customers of 
grocers, so that a blacklist may be kept of all bad risks, and 
reported to the trade in general as a protection against 



ESSENTIALS IN GRANTING CREDIT 385 

abuses. Credit that is extended upon such grounds is not 
only unsound, but highly dangerous — quicksand to engulf 
the unwary. 

Bank credit is often granted on the same principle. The 
bank man knows, or thinks he knows, his borrower. He 
deems him honest. He takes his note, renews it from time 
to time, worries over it, endeavors to get it reduced, or get 
an indorser; but after renewing until hope is lost, charges 
it off. But all credit granted upon such belief is costly, 
whether in banking or mercantile life, and is rapidly giving 
way, particularly in banking and large enterprises, to more 
scientific methods. 

Two Men Better Than One 

(2) The belief that if one does not pay, another will; 
therefore to the credit of the borrower is added that of an- 
other person, either upon indorsement or guaranty. This 
is more often used in banking than in other lines, it being 
frequently required that there shall be more than one party 
to the credit — "two-name paper." In European practice 
this is quite the general rule, credit instruments carrying at 
least two names being necessary to obtain the rediscount 
privileges of the central banks. But in smaller transactions 
it would be impossible to obtain this safeguard, the small 
debtor finding it difficult to obtain a guarantor of his debt, 
although in the cooperative credit systems of Europe this 
form of credit is most common; but this is due to the close 
association of years, family descent and personal contact 
that warrants risks of this kind. 

Past Performances 

(3) The belief that having paid in the past, the bor- 
rower will continue to pay in the future. The credit of the 
borrower may be ascertained from his "past performances." 
This may take on the character of close investigation into 
previous business dealings, or it may be based upon per- 
sonal knowledge of the debtor's record. Thus, a country 
grocery may change hands. The previous owner may place 
in the hands of the new proprietor a list of all customers 
iknown to be good pay. They have paid him regularly ; they 



386 THE PRACTICAL WORK OF A BANK 

doubtless will continue to pay regularly. They may be 
trusted. Other customers may be trusted to limited 
amounts; some not at all. 

In the retail trades the inquiry often takes the form of 
an investigation into the applicant's promptness in paying 
among dealers with whom he has carried an account. It 
may be an inquiry of the butcher, the tailor, the grocer; or 
it may be ascertained from a classified list compiled by com- 
mercial agencies giving the experiences of such dealers; or 
it may be a special report, carefully gathered. 

In banking the inquiry assumes the form of an investi- 
gation by a bank buying commercial paper, to ascertain if 
all such debts have been promptly met in the past, by corre- 
spondence among banks that have held such paper, and 
their opinion of the paper; or it may be an investigation by 
a bank or mercantile house as to the promptness with which 
the debtor has met his bills. If he has taken his trade dis- 
counts it is a sure indication of good management. His 
reputation with the trade is important. 

Property and Property Rights 

(4) Belief that the borrower has property or property 
rights sufficient to warrant the risk and assure payment. 
Credit is extended largely upon the debtor's financial condi- 
tion. This, too, may be elementary, and consist merely of 
the knowledge that the debtor owns a house and lot, or a 
business, or other property, which warrants the conclusion 
that he will pay because he has the means. Or, it may be 
the result of more careful methods, such as an inquiry into 
his financial affairs which finds expression in a statement of 
condition which, if honest and conservative, will reveal his 
financial standing. 

Collateral Loans not Essentially Credit Transac- 
tions 

A loan based upon collateral is not in the true sense a 
credit; for in the last analysis the advance is not made on 
the credit of the borrower, but upon the value of the property 
pledged as security. The mental process which obtains in 
such a transaction is not such as precedes the granting of 



ESSENTIALS IN GRANTING CREDIT 387 

an open credit; for the creditor says to himself: "I have 
property worth so much, under my control, belonging to my 
debtor. I think he will pay; I hope he will — but if he 
doesn't, I have enough of his property pledged to me to 
reimburse me, even though it declines in value." This is 
particularly true in mortgage and collateral loans. 

Upon these simple thought processes all credit operations 
rest. And the quality of the credit depends upon the degree 
in which these principles exist in a given transaction. But 
they are capable of infinite expansion and of manifold com- 
binations so that no two credit risks are exactly alike, 
and general rules must be applied in the light of the business 
under test. 

It is as difficult to apply abstract rules in credit as to ap- 
ply abstract rules in mathematics. But if the rule is ex- 
plained by applying it to a problem, clearness follows, and 
the student grasps the theory by having it applied. It is 
so in law, or any other department of learning. It is so 
in credit. 

Personal Credit 

By the term personal credit is meant credit based upon 
persons as distinguished from credit based upon property. 
Many who apply for credit, and are perfectly good risks, 
have nothing but themselves to offer as security, their prop- 
erty being of little or no consequence as collateral. To the 
essential element of honesty, there must, however, be added 
the security of an assured earning power. 

It is an obvious truth that if a man would pay, he must 
have the funds in hand or in expectancy. His honesty may 
be above criticism, his record unblemished, and yet if he has 
no income, his credit cannot be safe. And his credit is safe 
only in proportion to his income. This is the reason so many 
professional men are poor credit risks. Their income, while 
in a measure sure, is small, and frequently, as in the case of 
some ministers and lawyers, spasmodic. 

All those who appear before the public must maintain 
an appearance of neatness, if not prosperity. It is their 
misfortune and not their fault. They often use their credit 
to bolster up appearances and the creditor suffers. A man 
earning fifty dollars a month is most assuredly not a good 



388 



THE PRACTICAL WORK OF A BANK 



IN WRITING OF ANY MATERIAL!*- UNF AVORA8LE CHANGE IN OUR FINANCIAL CONDITION, ANO IN THE ABSENCE OF SUCH NOTICE OR OF A N* 
MENT THIS MAY BE CONSIDERED AS A CONTINUING STATEMENT ANO SUBSTANTIALLY CORRECT; AND IT IS HEREBY EXPRESSLY AGREED 
FURTHER CREDIT, THIS STATEMENT SHALL HAVE THE SAME FORCE ANO EFFECT AS IF DELIVERED AS AN ORIGINAL STATEMENT OF OUR 

SUCH FURTHER CREDIT IS REQUESTED. 



FOB THE PURPOSE OF PROCURING CREOJT FROM TJMETO TME 1 
AS A TRUE AND ACCURATE STATEMENT OF OUR FINANCIAL CONDITION ON 



I VOU FOR OUR NEGOTIABLE PAPER OR OTHERWISE, WE FURNISH THE FOLLOWING 



1 AND FULL 
THAT UPON 



WRITTEN STATE* 
APPLICATION FOR 



ASSETS 



Bills Receivable (net) 
Accounts Receivable (net) 

Merchandise 
Land 
buildings 
Machinery— Fixtures 



LIABILITIES 



Notes Payable 

ACCOUNT! 

Deposits 



;CNTINGENT LIABILITIES. ON BIOS RECEIVABLE DISCOUNTED- 



HAND AND IN BANK, *_ 



-NAMES OF BANKS- 



3ILLS RECEIVABLE. ANY OVERDUE OR 



. ANY FROM OFFICERS, DIRECTORS, I 



HIES OR SIMILAR SOURCES) 

ACCOUNTS RECEIVABLE. 6TATE AMOUNT DOUBTFUL, NOT FROM CUSTOMERS OR IN ANY WAY NOT REALIZABLE WITHIN IMMEDIATE FUTURE- 
MERCHANDISE. FINISHED UNFINISHED RAW— 



-VALUEO AT COST OR MARKET t 



IS ALL SALABLE J- 



LANp. DESCRIBE BRIEFLY 

BUILDINGS. COST* 

MACHINERY AND FIXTURES. COST i- 



.DEPRECIATION. 



OTHER ASSETS. 



' OF ASSETS UNAVAILABLE FOR PAYING DEBTS f_ 



NSURANCE. STATE KIND AND I 



NOTES PAYABLE. TO OWN banks 

ACCOUNTS PAYABLE. TERMS OF PURCHASE I 



-DO YOU DISCOUNT AND ANTICIPATE f_ 



DEPOSITS. TIME OR DEMAND I 













Ar.^RIIFni IARII ITIFS ,-rcumr 












RFBFRVFS rrruirr , 



NET SALES 

LAST FISCAL YEAR 
COST OF SALES . 

CROSS PROFTT . 
INTEREST, TAXES, DEPRECIATION, ETC 
DIVIDENDS PAID .... 
SURPLUS FOR YEAR 



HAVE THE BOOKS BEEN AUDITED BY I 



CERTIFIED PUBLIC ACCOUNTANT!. 

CORPORATE NAME. 



OFFICE ADDRESS- 



LOCATION OF PLANTS ANO BRANCH OFFICES- 
OFFICERS 



DIRECTORS 



STANDARD FORM OF CREDIT STATEMENT FOR CORPORATIONS ADOPTED BY AMERICAN 

BANKERS ASSOCIATION AND NEW YORK STATE BANKERS ASSOCIATION 



risk for a hundred-dollar debt due in thirty days. He might 
be a good risk for a hundred dollars' worth of furniture on 
three dollars or less a week ; but his earning power absolute- 
ly negatives the idea of being able to meet a large bill in a 
short period and no sane man would take the risk. Install- 
ment houses gauge the amount of goods they will sell a man 
largely by his income. 



ESSENTIALS IN GRANTING CREDIT 389 

Personal Credit Distinguished 

Individual credit consists of two varieties, secured and 
unsecured. Under the first head come all sorts of goods 
sold on the partial payment plan, such as pianos, sewing 
machines, household goods of every description, phono- 
graphs, books, jewelry and clothing. Sales to merchants are 
delivery trucks, scales, typewriters, cash registers, etc. The 
security lies in the vendor's lien, as evidenced by a condi- 
tional bill of sale or chattel mortgage. In the former case, 
title to the property does not vest in the buyer until the last 
payment is made and recovery of the goods is a simple mat- 
ter; but in the chattel mortgage, title passes upon consum- 
mation of the sale and the mortgage lien follows. To col- 
lect by lawful recourse means foreclosure — a slow and costly 
process. The security is in the goods more than in the per- 
son, as important as the latter element may be. 

Enormous quantities of goods are sold on this plan, 
many flourishing businesses being built up by the long term 
of credit extended and the easy terms allowed. 4 The risk 
lies in the fact that the goods may be used or misused for a 
time and returned, or carried away secretly so that follow- 
ing them is expensive; but the increased sales and large 
profits offset such losses. Moreover, the prices are much 
higher than for cash, it being not uncommon for installment 
houses selling furniture to mark the goods at from two to 
three hundred per cent, profit; and for very good reasons. 
Good houses, however, endeavor to obtain as large an initial 
deposit as possible, so that the buyer's equity will be large 
and default, therefore, expensive to him. Completion of the 
contract is desirable to both seller and buyer. 

Secondly, the unsecured credit, which is based solely 
upon the borrower's promise and the seller's expectancy that 
he will pay. To illustrate : Many school teachers, policemen, 
firemen, municipal employees, clerks, clergymen, and others, 
maintain charge accounts at the retail stores. The reason 
for this will be noted below. They have no real property, 
as a rule, and frequently but little personal. And yet they 
are generally regarded as good credit risks, on the strength 
of their "job." The only security, aside from their honesty 

^One installment house in New York does a yearly business of over $2,000,000 
in one branch, and has 20,000 open accounts. 

26 



390 



THE PRACTICAL WORK OF A BANK 



i TRUE J 



FOR THE PURPOSE OF PROCURING CREDIT FROM TIME TO TIME WITH YOU FOR OUR NEGOTIABLE PAPER OR OTHERWISE, WE FURNISH THE FOLLOWINO 
I ACCURATE STATEMENT OF OUR FINANCIAL CONDITION ON 19 . WE AGREE TO AND WILL NOTIFY YOU IMMEDIATELY 



IN \SRITING OF ANY MATERIALLY UNFAVORABLE CHANGE IN OUR FINANCIAL CONDITION, AND IN THE AS8ENCE OF SUCH NOTICE OR OF A NEW AND FULL WRITTEN STATE- 
MENT, THIS MAY BE CONSIDERED AS A CONTINUING STATEMENT AND SUBSTANTIALLY CORRECT; AND IT IS HERE3Y EXPRESSLY AGREED THAT UPON APPLICATION FOfl 
FURTHER CHEDIT, THIS STATEMENT SHALL HAVE THE SAME FORCE »NO EFFECT AS IF DELIVERED A3 AN ORIGINAL STATEMENT OF OUR FINANCIAL CONDITION AT THE TIME 
SUCH FURTHER CREDIT IS REQUESTED. 



ASSETS 


LIABILITIES 


CASH 


— 






— 


Notes Payable 
Accounts Payable 
Deposits 
Mortgages 
Accrued Liabilities 


— 
















































1 














— 






















































TOTAL 

Net Worth 
Reserves 
























| . 






































TOTAL 




i 




TOTAL 









CONTINGENT LIABILITIES, on bills receivable discounted- 

CASH. on hand and in bank, $ ; 

BILLS RECEIVABLE, any overdue or doubtful) 



IF 6ANK8- 
FROM ME 



I OF FIRM OR SIMILAR 



ACCOUNTS RECEIVABLE, state amount doubtful, not from customers or in any way not realizable within immediate future 

UNFINISHED RAW VALUED AT COST OR MARKET I IS ALL SALABLE I 

ASSESSED VALUE MARKET VALUE- 



MERCHANDISE. 

LAND. DESCRIBE BRIEFLY 

BUILDINGS. COST* 

MACHINERY AND FIXTURES. COST *_ 
OTHER ASSETS. 



.DEPRECIATION- 



-DEPRECIATION- 



ARE ANY OF ASSETS UNAVAILABLE FOR PAYING DEBTS ! 



INSURANCE. STATE KIND AND AMOUNT- 



NOTES PAYABLE. TO OWN BA 



-THROUGH BROKERS- 



-OTHERWISE- 



ACCOUNTS PAYABLE. TERMS OF 
DEPOSITS. TIME OR DEMAND I 



-DO YOU DISCOUNT AND ANTICIPATE I 



-FROM WHOM I 



MORTGAGES. DUEt- 



ASSETS A LIENT 



ACCRUED LIABILITIES. ITEMIZE- 
NET WORTH 



GENERAL PARTNERS 



SPECIAL PARTNERS 



AMOUNT CONTRIBUTED I OUTSIDE NET WORTH 



AMOUNT CONTRIBUTED 



DATE OF PARTNERSHIP |j DATE OF EXPIRATION I 

IS THE FIRM, Oft ANY MEMBER THEREOF, CONNECTED WTTH ANY OTHER LINES OF BUSINESS I 

RESERVES. fTEMlZE , . , — _ 

NET 8ALES 

LAST FISCAL YEAR . _ 

COST OF SALES ....'..... '. . 

GROSS PROFIT . 

INTEREST, TAXES, DEPRECIATION, ETC « . — — — 

WITHDRAWALS BY PARTNERS .....,,.. , _ 

CAIN FOR YEAR .' 

HAVE THE BOOKS BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT I IF SO, GIVE NAME Of FIRM ANP DATE OF AUDIT- 

ADDRESS AND DATS. FIRM NAME 



BY- 



STANDARD FORM OF CREDIT STATEMENT FOR FIRMS ADOPTED BY AMERICAN BANKERS 

ASSOCIATION AND NEW YORK STATE BANKERS ASSOCIATION 



and good character, and the garnishee process where such 
is possible, lies in the fact that the applicant has steady em- 
ployment. But many who are on the charge ledgers of the 
great stores do not even bring the qualification of an assured 
income, being salesmen, clerks, and others whose earnings 
are largely dependent upon commissions and the state of 
trade. 



ESSENTIALS IN GRANTING CREDIT 391 

The Granting of Personal Credit 

In the granting of personal credit two things are neces- 
sary to determine: First, that the applicant is honest and 
well regarded by those in position to know; and, secondly, 
that he has the funds, in anticipation, at least, to meet the 
debt as it falls due. He has "discounted the future" — will 
the future bear discounting? These are the questions to 
determine. 

The starting point lies in the application. This prefer- 
ably is an envelope of good quality, so that the information 
may be filed therein, with the original data written on the 
outside. Too much cannot be known about the applicant. 
The problem is to get it diplomatically, and correctly, and 
without offense to the delicacy that attends the asking for 
credit, particularly pergonal credit. 

The application includes: First, the full name of both 
husband and wife. Most of the credits in retailing are 
opened by the wife who does the shopping, and generally in 
her own name. (It is estimated that fully eighty per cent, 
of personal credit is with women.) But the husband being 
the bread-winner is the important element to consider. 
Next, the residence and how long there. Long tenancy is 
a good omen. "Movers" are not, as a rule, desirable, either 
as tenants or as credit risks. Husband's occupation and 
how long employed in present and past positions. Refer- 
ences come next. These are usually two in number, and are 
preferably those who have dealt in a business way with the 
applicant, and especially on credit. 

References 

Bank references are most satisfactory, and are attended 
with no embarrassment to the applicant. But it is surpris- 
ing how many who have bank accounts buy furniture on 
the installment plan, as an easy way of saving (?) money; 
or, to speak correctly, an easy way of paying for such arti- 
cles, frequently unnecessary. Savings banks, as a rule, do 
not give references without explicit order from the depos- 
itor, and such references are not usually satisfactory, while 
banks of discount are, as a rule, glad to extend the courtesy, 
but without obligation on their part. 



392 THE PRACTICAL WORK OF A BANK 

It is interesting to note that many who have gone 
through life on the pay-as-you-go-or-don't-go basis, find it 
embarrassing, to say the least, to give references when ap- 
plying for credit. 

Only personal friends can be used as references in such 
cases, and many a proud spirit rebels at letting even their 
closest associates into their personal secrets. Diplomacy is a 
fine art here, and many a sale has been lost because a deli- 
cate situation was badly handled. 

Personal Credit Ratings 

Having the application as a starting point, the investi- 
gation follows. The first step is to look up the applicant 
in the credit rating books. These are compilations made 
from careful investigations by credit reporting companies, 
giving the experiences of those who have sold the parties 
named therein. By a system of letters or figures these ex- 
periences are summarized, as, for instance: "John Smith, 
402 West Seventy-second street, PPP," means that three 
dealers have sold to John Smith and found him satisfactory 
and prompt in his payments. If more detail is wanted a 
special report can be obtained for a small fee, and this goes 
quite extensively into the applicant's record. 

The attempt to classify and rate personal credit risks is 
to be encouraged. At best it is not absolutely accurate; but 
working upon the theory that having paid one merchant 
the buyer will pay another, some degree of safety may be 
obtained. Blacklists have been made out, and experiences 
exchanged, which when made with care are a safeguard not 
to be despised in the granting of personal credit. 

Next, the references are written to, the letter being 
couched in such terms as to hide the real reason for the re- 
quest except that it is an inquiry into the person's habits and 
general financial situation. Next comes the "neighborhood" 
inquiry. This usually consists of a personal investigation, 
looking into the person's desirability as a tenant, a neighbor, 
a boarder, etc. Nearby stores are frequently visited to as- 
certain if the party trades with them and if so upon what 
basis and with what results. All this is done as by an ama- 
teur detective, so that embarrassment does not follow. Last- 
ly, but in many cases, first, comes the verification of the 



ESSENTIALS IN GRANTING CREDIT 393 

business connection. This is often done so cleverly that the 
applicant himself is interviewed without knowing the ob- 
ject of the visit, and many credits are opened on this test 
alone. 

Many applicants for credit do not want their superiors 
to know of their condition, while others do not care. Length 
of service counts for much and some credit men will pass 
an application upon the strength of long employment in 
one place, and well they might. Where the applicant is a 
public officer, whose habits are well known, and whose com- 
pensation is a matter of record, no other investigation need 
follow. For instance, in New York a list is published of 
all municipal employees and school teachers, so that such in- 
formation is easy to obtain. This, too, is often deemed 
sufficient to open a credit. 

Individual Credit vs. Mercantile Credit 

Individual credit is to be distinguished from mercantile 
credit. While individual credit is credit extended by a busi- 
ness concern to an individual as such, mercantile credit is 
the credit extended by one business house to another as such. 
The credit which John Smith the individual seeks for his 
household purposes differs from that which he seeks as a 
trader. The one is consumptive credit; the other trading 
credit. 

The same process which obtains in the granting of per- 
sonal credit takes place in extending mercantile credit, in its 
essentials, but has surer grounds upon which to work, and 
usually has property as a basic element. Honesty, business 
sagacity and a good record among the trade are as essen- 
tial in mercantile credit as the qualifications mentioned 
above are essential in personal credit. 

In the place of the references above indicated, we have 
the trade references. In the place of the neighborhood in- 
quiry, we have the banking and mercantile inquiry, seeking 
to discover how the borrower has conducted his affairs in the 
past. And lastly, in the place of earning power as an in- 
dividual we have earning power as a trader, and this is evi- 
denced by his statement which reveals his present condi- 
tion, and in comparison with previous statements and profit 
and loss accounts indicates the profitableness of the business. 



394 THE PRACTICAL WORK OF A BANK 

Individual credit has well been called consumptive credit ; 
for the credit is used, as a rule, in order to satisfy present 
needs from future income. Retail credit is quite general 



QUESTIONAIRE 



ASSETS 



CASH -HOW MANY RAMK A<W>IIMTft> 

BILLS RECEIVABLE (NET) ; 

ANY EXCEPT FOR MERCHANDISE «*' c«* ANY DISCOUNTED ?- 

ACCOUNTS RECEIVABLE (net) 



ALL FROM CUSTOMERS AND GOODt- 

MERCHANDISE 



WHAT IS ITS CONDITION ? = ANY OLD OR UNSALABLE t- 

REAL ESTATE AND BUILDINGS 



CONDITION OF STORE OR PLANT. 

OTHER ASSETS 



IS THERE ANY LIEN ON SO-CALLED QUICKASSET8J , , ,.. 

LIABILITIES 

NOTES PAYABLE 

DO YOU USE BROKERS AND AT SAME TIME BORROW FROM YOUR BANKS? 

ACCOUNTS PAYABLE 

DO YOU DISCOUNT ALL YOUR BILllSf DO YOU ANTICIPATE f- 

DEPOSITS 



ARE THEY ON TIME OR DEMAND? FROM WHOM ?____ 

BONDED DEBT AND MORTGAGES 

HOW SECUREDT ANY CHATTEL MORTGAGES OUTSTANDING K 

OTHER LIABILITIES— CONTINGENT OR OTHERWISE J 



MISCELLANEOUS 



CAPITAL 



PREFERRED . , , ,. , COMMON 

NET WORTH 

ANY OUTSIDE INTERE8T8 OF FIRM Oft MEMBERS U 
RESERVES 

DESCRIBE 

INSURANCE 



SALES (NET). TO PUBLIC- 



GAIN FOR YEAR AFTER/ PAYING ALL EXPENSES, INCLUDING DIVIDENDS OR WITHDRAWALS- 
BOOKS EXAMINED BV CERTIFIED PUBLIC ACCOUNTANT? ., , 

NATURE OF BUSINESS .-.,. , , , 



THIS QUESTIONAIRE IS TO BE USED BY BANK OFFICERS OR HEADS OF CREDIT DEPART- 
MENTS IN DISCUSSING STATEMENTS HANDED IN BY THE MAKERS IN EXAMINING 

STATEMENTS BANK OFFICERS CAN CHECK OFF THOSE POINTS WHICH THEY WISH 

INVESTIGATED FURTHER BY THE CREDIT DEPARTMENT THIS SHOULD BE USED WITH A 

CARBON, THUS GIVING A DUPLICATE RECORD 



ESSENTIALS IN GRANTING CREDIT 395 

for the necessities of life and sometimes the luxuries. It is 
not based upon an exchange of goods. It does not bridge 
the time from one process to another, but is extended that 
present wants may be purchased upon expectancy. It is an 
annuity working backwards. 

Commercial or mercantile credit, however, has produc- 
tion in mind. It "carries" a business transaction. It fills 
the void between purchase and sale. It gives the buyer time 
to turn the goods into money before he pays for them. It 
gives the manufacturer time to turn raw material into fin- 
ished products before payment is due. It provides working 
capital. It is productive credit, and the whole process of 
production, transportation and distribution is based upon it. 

The Charge Account 

To distinguish again by example, let us take a typical 
illustration of an application for personal credit. A school 
teacher, for instance, applies to a department store for a 
monthly charge account. The reasons may be few or many. 
She may be short of funds and trading upon her expected 
salary. She may prefer to shop on a charge account be- 
cause it eliminates the carrying of money and simplifies the 
return of goods. She may like the prestige a charge ac- 
count gives her. She may have been solicited to open such 
an account. She buys, not to sell again, but to consume. 
Not a single purchase is for reselling, but for the satisfac- 
tion of her wants. Proving satisfactory upon investigation 
as to her position and personal habits, she gets the credit. 

But John Smith, the merchant, buys to sell again. He 
has property. He has a record; he has a reputation. His 
affairs are easily checked. He makes a statement of condi- 
tion, which if wilfully wrong is a felony. We find that for 
every dollar he owes he has one, two, or two and a half in 
hand or due him. We can have an audit. 

We can with a fair degree of accuracy judge our risk, and 
know that by the extension of the credit he will make a 
profit and we will make a customer. We base one credit 
solely upon the person; the other, in a very large measure, 
upon the property. In the former we expect to find but 
one (perhaps two) of the "big C's of credit" — (Character, 
Capacity and Capital) — namely, character. In the latter, 



396 THE PRACTICAL WORK OF A BANK 

we must have all in some degree, and preferably all in a 
large degree. But the capital element is generally entirely 
lacking in personal credit, while an essential element in 
trading credit. Lack of capital is responsible for more fail- 
ures than any single cause. 

The Growth of Personal Credit 

The growth of individual credit may be ascribed to three 
causes: (a) The desire to extend business. Many concerns 
catering to the retail trade encourage charge accounts and 
carry thousands of them on their books, knowing full well 
that credit accommodations lead to over-buying. Well- 
rated people are constantly solicited to open such accounts; 
and not knowing how their names are secured, take it as a 
compliment and are flattered thereby, (b) The fear of of- 
fending customers by refusing credit. This is particularly 
true in very small establishments, where to refuse the request 
to "charge it" would lead to loss of custom. Moreover, 
it is harder to refuse a small credit than a bank loan. One 
is strictly personal in its setting, while the other may be re- 
ferred to that impersonal "discount committee" which exists 
often in name only, but is a good bumper between the offi- 
cial and the applicant, (c) The all-too-prevalent tendency 
to live beyond's one's means, making it necessary to live on 
expectancies rather than realities. 

Personal credit is often used to bolster up a tottering 
man. It is used to create impression. Credit men could 
tell tale after tale of charge accounts abused, and install- 
ment buying resorted to by those who would ordinarily dis- 
dain such a transaction, for no other reason than to make an 
appearance. The credit that wrecks business in New York 
is not Third Avenue credit, but Fifth Avenue and River- 
side Drive credit. Third Avenue may have a certain kind 
of credit (usually the dollar-a-week credit), while Riverside 
Drive has credit (or gets it) and rarely thinks of paying 
cash. A Fifth Avenue tailor told the writer recently that 
his accounts run from two to four years, and "a little cash 
now and then looks mighty good to him." 

This abuse of personal credit is notorious among the 
rich, the idle rich, the would-be rich, or the was-rich. This 
condition may be due to the mental conclusion that because 



ESSENTIALS IN GRANTING CREDIT 397 

they are good for their debts, they need not hurry to pay 
them; or it may be due to ignorance of what the tardiness 
costs them. The tailor above mentioned admitted that he 
got ample interest on his money by the long delay, the in- 
terest charge being concealed in the price of the garment. 
But were he given his choice, he would doubtless choose 
shorter credit and less profit. 

The credit man of one of the large department stores 
that caters to Fifth Avenue trade states that Fifth Avenue 
pays as promptly as can be expected if proper credit 
methods are used. If the risks are selected and the credit 
machinery effective, no complaint will arise as to the desir- 
ability of the patronage of the wealthy. The tailor does 
not select his risks. 

Period or Personal Credit 

The period for which individual credit is extended 
should coincide with the debtor's periods of income. In the 
case of the wage-earner, who receives his pay weekly, weekly 
credit would be justified, but prompt settlement should be 
demanded in order that the debt might not overlap into an- 
other period. Salaried men who are paid monthly may safe- 
ly be carried for a month, but the same rule applies. Those 
whose earnings are dependent upon fees, which may be more 
or less uncertain or spasmodic, cannot in the nature of 



New Business.-.. 

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RECORD OF NEW ACCOUNTS, FILED IN CREDIT OFFICE 



398 THE PRACTICAL WORK OF A BANK 

things be in funds regularly, and credit in such cases is of 
longer duration than in the case where income is steady 
even though small. 

The time element is a factor of no mean import in in- 
dividual credits. The obligation of the merchant has a fixed 
maturity, if in the form of a note, and generally so, if in the 
form of a book account, especially with the system of cash 
discounts now so generally prevailing. He expects to meet 
his bill or his note at maturity. Not so, however, in per- 
sonal credit. While the terms may be thirty or sixty days, 
this means nothing to the charge customer. He pays when 
convenient. Ask the average charge customer what are the 
terms of his credit, and when he pays his bills, and he will 
answer, if honest, "At my convenience"; and sometimes 
"Never!" 

While in a measure personal credit is perhaps the most 
risky, yet on the broad assumption that the average man is 
honest, it need not be attended with undue dangers. It re- 
quires diplomacy, skill, knowledge of human nature, tact, 
courtesy, firmness. To get business; to hold it; to say "no" 
and do it kindly; to be liberal, yet safe; to select the good 
and discard the bad — all this falls to the lot of the personal 
credit man. 

Losses in Personal Credit 

The losses in personal credit must in the aggregate be 
enormous. The losses compiled by the agencies do not and 
cannot include those unrecorded losses suffered by retail 
merchants the country over. Thousands of small groceries, 
laundries and butchers accept these little, and sometimes 
big, losses as a matter of fact — a necessary evil in their busi- 
ness — and make the best of it, satisfied to make a living in 
spite of them. From the small corner grocery to the huge 
department store, whose losses . are kept down by better 
methods, this evil appears, as an open sore, to be kept under 
some control, but not entirely healed. It is no wonder that 
the merchant thrives who sells for cash only. His profits, 
though small, are certain, and a dollar in the till is worth 
two on the books. 

Lawyers cannot collect for their legal services; doctors 
for their professional calls; the latter being especially sub- 



ESSENTIALS IN GRANTING CREDIT 599 

ject to this abuse, not to speak of those losses taken by in- 
dividuals who loan their friends money, in the hope that 
payment will some time be made, and find they have mis- 
taken a gift for a loan. 

Personal Credit the Foundation of the Credit System 

It is obvious that personal credit is the very foundation 
of the whole credit structure. If the retailer extends credit 
unwisely, so that his bills cannot be promptly met, the job- 
ber or wholesaler cannot meet his. The manufacturer in 
turn cannot meet his, and the weakness extends to the whole 
system. If, on the other hand, the retailer extends credit 
only to those worthy and prompt (as all well regulated 
credit departments endeavor to do) or trades for cash, the 
next in line feels the stimulus, and so on through the whole 
course of trade. 

Business cannot long be conducted on mere book ac- 
count. While the account receivable is a simple and ordi- 
narily a good credit instrument, prompt settlement is the 
very essence of sound business. Payment in some more 
desirable form of credit instrument must not be long de- 
layed, for with the assets of business in form of accounts 
receivable the burden of carrying the credit becomes too 
great a strain upon banking capital, and bankruptcy en- 
sues. Many a business has been wrecked upon the quick- 
sand of personal credit. 5 Whom to trust is the problem 
of all business. To get the money for goods sold is the 
function of the credit department as well as to decide who 
shall have goods on credit and upon what terms. And to 
collect money is as fine an art as to sell goods. 

Mercantile Credit 

In its economic sense mercantile credit is the power to 
secure goods for the purpose of exchange in return for a 
valuable consideration promised in the future. It is a sale 
of goods on time. 6 

5'fhe accounts of a large department store in New York were scaled down 
twenty-five per cent, upon a careful audit — a very large shrinkage, due in the 
main to too liberal credit methods. 

6Hagerty, "Mercantile Credit." 



400 THE PRACTICAL WORK OF A BANK 

In a previous paragraph we have discussed productive 
credit and consumptive credit; and while personal credit is 
largely consumptive credit, mercantile credit is quite alto- 
gether trading credit — carrying credit. 

Commercial credit and personal credit combined are 
like the piers of the Brooklyn Bridge — they carry the load. 
It must be sound, or the credit system collapses. Weakness 
in the credit methods of the retailer or the jobber carries 
weakness to all above him. Take the case of cotton. 
The farmer having pledged his crop to feed his hands and 
grow his crop, has expected to pay the merchant when he 
sold his cotton. He cannot sell. The merchant, not receiv- 
ing his money, cannot pay his jobber. The jobber cannot 
pay the manufacturer, and he cannot pay his bank. And so, 
one is dependent upon the other, as current history demon- 
strates, and strength for one is strength for all; and weak- 
ness in one spells weakness for all. 

Benefits of Commercial Credit 

The benefits of commercial credit are so well understood 
that the primary benefit only needs to be mentioned to sug- 
gest others, that is, the enhanced profit that follows the use 
of credit. For instance: A merchant has a capital of $10,- 
000 and borrows $40,000. Suppose he makes a gross profit 
of ten per cent, on the capital employed, and has, therefore, 
$5,000 as the result of his trading. He pays five per cent, 
on his borrowed capital, which reduces the profit to $3,000. 
But if he had not borrowed, and used only his own capital at 
the same rate, he would have netted but $1,000; therefore, 
by using the credit that rested upon his original capital rein- 
forced by his ability and integrity, he has made $2,000 as a 
reward for knowing how to employ banking credit. 

Bank Credit Rests Upon Mercantile Credit 

The credit with which a bank deals consists in issuing 
bank notes, redeeming checks and certifications, meeting its 
acceptances and lending money. Its credit operations, how- 
ever, would be largely impossible were it not for mercantile 
credit. The functions of note issue and deposit exist be- 
cause of business dealings; and if there were no business 



ESSENTIALS IN GRANTING CREDIT 401 

debts settled by negotiable paper the function of discount 
could not obtain. It is the function of the bank to carry 
the debts that business creates ; and as these debts are sound, 
the banking operations based thereon are sound. This is 
the reason the Federal Reserve Board has been so particu- 
lar that the bills offered for discount shall arise out of mer- 
cantile dealings — productive and consumptive processes, and 
not speculative. The basic principle laid down in their defi- 
nition of November 10, 1914, was that the debt shall be self- 



<s.jj.^ 



JV< 



-,_ 190 :sS" 



Answered Enquiry from 



See Letter Bool*-?? A- Folio %£..„ 

MEMO OF INQUIRY ANSWERED REGARDING CUSTOMER'S STANDING 

liquidating, of short duration, to cover the time lapsing be- 
tween one process and another, the longer time paper neces- 
sary for agricultural and stock-raising purposes being limit- 
ed to twenty-five per cent, of the capital of the Reserve 
Bank paid in. 

The power to create credit in banking rests to a consid- 
erable extent upon mercantile credit. The merchant takes a 
note to the bank, and gets it discounted. He does not want 
gold, or bank credit in the form of bank notes, but a credit 
on its books. The banker, therefore, places the amount to 
his credit and permits him to draw checks against it. On 
the asset side of the statement the banker has the obligation 
of the maker of the note, reinforced by the indorsement of 



402 THE PRACTICAL WORK OF A BANK 

the one discounting; and as a liability he has the debt cre- 
ated by the above credit. On the soundness of the asset de- 
pends the soundness of the liability; for the banker's chance 
of receiving back the funds he disburses in paying the checks 
depends upon the goodness of the instrument in his leather 
portfolio. 

Bank Credit Should Facilitate Exchanges 

Theoretically, no advance of bank credit should be made 
in any form except to facilitate a socially productive ex- 
change of wealth, the final payment for which is temporarily 
deferred. Bank credit is a medium of exchange whose ex- 
istence is made possible by the assumption on the part of the 
bank of a corresponding liability to pay cash on demand. 
The nature of this liability precludes the use of bank credit 
for any but short periods of deferred payments and for any 
purposes except bona fide exchange transactions. It bridges 
the gap between the surrender of capital and the receipt of 
payment for it. Its purpose is to anticipate a credit al- 
ready established rather than to create one anew. 

Loans made simply to enable an owner of commodities 
to hold them for a rise do not grow out of exchange trans- 
actions. An additional medium of exchange is needed only 
when there are additional exchanges, and the holding of 
goods back from exchange reduces and does not add to the 
number of such exchanges. However profitable speculative 
and similar loans may be to those immediately concerned, 
they are not a safe basis for advances by note-issuing or 
reserve-holding banks. 7 

Channels of Mercantile Credit 

The channels of mercantile credit are four: (a) Finan- 
cing the raw material. The production of raw goods on the 
farm is carried on largely through private capital or person- 
al credit, there being no goods to pledge except those in ex- 
pectancy. The crop-lien system of the South is illustrative 
of this. The farmer having no funds to plant and fertilize 
his crop, secures credit by pledging his expected crop to the 

^Eugene E. Agger, Columbia University, in "Journal of Political Economy." 



ESSENTIALS IN GRANTING CREDIT *08 

banker, or most likely to the merchant, who advances the 
fertilizer, the food for the hands, and the implements, taking 
as security a mortgage on the crop. The wheat farmer may 
borrow on his note at the bank, with or without security, or 
likewise obtain credit at the merchant's; but the crop hen is 
peculiar to the South. The cattle-raiser may obtain a chat- 
tel loan with his cattle as security, and so on down the list, 
the producer pledging the thing he expects to raise, is rais- 
ing, or hopes to raise, most frequently to a bank, as security 
for his advances. 

From the producer the goods go to (b) the manufactur- 
er, who turns them into finished products. But this is to a 
large extent (on the producer's end) a cash transaction, the 
bank making the advance on the goods when shipped. Raw 
material, wool, cotton, wheat, etc., moves on bills of ex- 
change with bills of lading attached. These are sold to 
banks, one after another, until the goods reach the manu- 
facturer, who not having capital enough to carry the raw 
articles, pledges them to a bank, takes them out of ware- 
house as needs require, and pays for the same from the 
sales of finished products. 

(c) Next come the wholesalers, jobbers and middle- 
men, who find the retailer. These finance their transactions 
either by giving the manufacturer their notes, or by borrow- 
ing in the market and paying cash. The banks still carry 
the debt by buying the receivables, single-name paper, or by 
loans direct to the dealer. 

(d) The retailers now come in to dispose of the goods 
to the final consumers, and herein comes largely the book 
account credit. Of course, this form of credit exists in many 
of the other processes, but in retailing especially. These ac- 
counts are frequently pledged to banks; single-name paper 
is sold largely on the strength thereof, so that the bank in 
the end carries the credit operation, and this is its proper 
function. 

But in all these processes, the factor of commercial credit 
runs. If the mercantile credit is sound, the banking credit 
will be sound ; and unsoundness in the one works havoc with 
the other. And in the line of descent, each factor has the 
means of ascertaining with considerable nicety the quality 
of the credit, except the retailer, and upon him rests the 
greatest risk. 




1 



O " 



to 9 

5^ 



CQI 



o 



«3 






II 



404 



ESSENTIALS IN GRANTING CREDIT 405 

The tendency of the times is to eliminate the middleman, 
and sell from mill to retailer and cut out the additional 
profits that must be added to selling prices as more handling 
becomes necessary. For every process there must be a 
profit. If the manufacturer sells to the jobber in the large 
city, and he to the jobber in the small city, and he to 
the merchant, and he to the consumer, there must be the cost 
of many handlings and a profit for the capital that is neces- 
sary in the various transactions, together with remuneration 
for the proprietor. 

Buying and Selling Without Cash 

Whatever the financial process, the bank intervenes and 
buys the credit instrument. It is possible to carry a cargo 
of cotton from planting to consumption by the use of mer- 
cantile credit reinforced by banking capital to buy the in- 
struments. To illustrate: the cotton planter in the South 
has no money. He goes to the bank and gives his note, se- 
cured by a crop in expectancy. He might, as many now do, 
and as has been the custom in the past quite largely, go to 
the village storekeeper and get his seed and his plow and 
groceries for the hands and himself while the crop is matur- 
ing, turning in his cotton when harvested to pay his debt and 
carry him until planting time comes again; but in the end 
the bank will carry the burden, for the merchant will borrow 
of the bank to buy the goods that feed the farmer. The 
crop matures. It is gathered, ginned, baled and shipped, 
and the loan to the bank or merchant is cancelled. 

In order to show further the practical uses of commer- 
cial credit, and the possibility of moving a consignment of 
goods from producer to consumer without the use of indi- 
vidual capital, and, in fact, without the use of money ex- 
cept in the open markets of Europe, it is proposed to trace 
such a transaction in detail. The incidental expenses such 
as freight and insurance, etc., must be paid for in cash; but 
the merchandise is paid for from money accumulations in 
the broad market. 

Let us suppose that a Texas merchant becomes a cotton 
buyer. He has no adequate funds, and, therefore, arranges 
with his bank to honor checks given by him to various farm- 
ers for cotton purchases, the security to be the cotton placed 

27 



406 THE PRACTICAL WORK OF A BANK 

in warehouse and warehouse receipts lodged with the bank 
as security for the advances. As the checks are presented 
they are credited to the farmers' accounts. 

The Texas buyer sells the cotton to a New York ex- 
porter. Draft for the amount is drawn, documents at- 
tached, and handed to the Texas bank for credit to the mer- 
chant's account, which pays his debt to the bank. 

The Texas bank sends the draft to its New York corre- 
spondent for collection and credit. 

The New York bank presents the draft to the exporter 
and is told that a like amount of cotton of the same grade 
has been sold to a Liverpool merchant and is ready to move. 
The exporter, therefore, makes payment by handing a draft 
with shipping documents, to the bank, which sells the draft 
and from the proceeds pays the Texas draft, by crediting 
the Texas bank with the amount. 

In handling commodities which move by slow freight, 
and which are of standard grades, it is common practice to 
honor drafts against the same, which, of course, travel 
faster, by securing bank loans on the commodity, lodging 
the bills of lading as security for goods in transit, and ware- 
house receipts for goods in storage. When a quantity of 
goods is sold and is to be released, the bank would, of course, 
credit the shipper with the draft presented as an offset to 
his loan. If more margin should be required, it would be 
furnished by lodging additional bills of lading, even for 
goods not yet arrived. In the grain trade there is a con- 
stant shifting of bills of lading as goods move in and out 
of the merchant's possession; the idea being that the bank 
shall have a lien on the goods, irrespective of where they 
may be. It makes advances against goods coming in, and 
credits payments against goods moving out, the security in 
both cases being in its possession of the bills of lading. 

The New York bank forwards the draft to a Liverpool 
bank which presents to the spinner. He accepts, the draft 
is sold in the market and proceeds credited to New York. 

Having sold the cotton to a spinner on a sixty-days' 
draft, the cotton goes to the mill for manufacturing into 
cloth. 

The cotton having been turned into cloth, is sold, let us 
assume, to a New York jobbing house. The goods go for- 
ward, draft is drawn on London, where an acceptance has 



ESSENTIALS IN GRANTING CREDIT 407 

been arranged by the New York house. The draft is pre- 
sented to the London bank, accepted and sold in the mar- 
ket, documents released and sent to New York. From the 
proceeds of this draft the spinner will meet his acceptance 
due in Liverpool. The goods are now in the jobber's hands, 
a note running to the New York bank to secure it for the 
acceptance, in the latter's possession. 

The jobbing house has sold the goods to the same mer- 
chant in Texas who purchased the cotton from the farmers. 
The goods are shipped and payment made therefor, by note 
at sixty days, which the New York house lodges with the 
New York bank. On the strength of this note, the New 
York bank could remit, several days before the acceptance 
which it arranged with the London bank is due, an amount 
sufficient to take up the acceptance. But having credit with 
the Liverpool bank for the proceeds of the cotton draft, it 
sends a banker's draft for the amount and the transaction 
is closed. 

The goods are sold to the farmers on thirty days' book 
credit. When the farmers pay their debts, they will draw 
checks on the bank to the order of the merchant, which the 
merchant will deposit to his account, and when his note is 
due, the New York bank which discounted the note will 
send it home for payment, and it will be charged to his ac- 
count, and paid by New York draft against the balance of 
the Texas bank. From start to finish, therefore, the bank- 
ing machinery here crudely outlined will have carried the 
debts as they passed from one stage to another. 

Out of these operations in mercantile credit arise the in- 
struments of banking credit, promissory notes, bills of ex- 
change, drafts and book accounts. The mercantile world 
furnishes the transaction and the instrument; the banking 
world the cash for the foundation and the machinery for the 
credit operations. The evidence of one debt is the founda- 
tion for another. Thus the note of the merchant discounted 
by a bank affords the basis of the credit to the discounter's 
account, against which he checks; and is soon to afford the 
foundation for the issue of our currency, for by the Federal 
Reserve Act, Federal Reserve notes may be issued secured 
by paper eligible for rediscount, the Federal Reserve Bank 
carrying a reserve of forty per cent, in gold and 100 per 
cent, in commercial paper against notes so issued. The 



408 THE PRACTICAL WORK OF A BANK 

debt of one country to another, of the bank to the depos- 
itors, and the bank to the public in general, rests in the last 
analysis upon the credit instrument which arises from the 
transaction between two dealers. Prendergast in "Credit 
and Its Uses" well says: "Commercial credit merges itself 
into banking credit by purely natural processes, which in 
turn assume the control of the commercial market in a uni- 
versal sense." 

Changing Conditions in Mercantile Credit 

The changing conditions in mercantile credit are the out- 
come of the Civil War. Prior to that time the merchants 
bought on long-time credit, giving their notes. But the un- 
certainties of the value of the greenbacks led merchants to 
offer cash discounts for prompt payment, and in order to 
take these discounts, which are often liberal and highly 
profitable, the merchant now sells his paper through brokers 
and pays cash within the discount period. Thus we have 
the cash discount system and the single-name paper. The 
longest terms known to the writer on open account are in 
the textiles, where discounts are allowed as long as four 
months from date of invoice, and this frequently dated 
ahead. 

The buyer no longer takes his semi-annual trips to mar- 
ket, being visited by travelling salesmen weekly, monthly or 
seasonally. Although, where it is a matter of style, buyers 
to a large extent still make their periodical trips to the large 
city to see the assortments. The mercantile agency has 
made it no longer necessary that the buyer and seller know 
each other personally. Some large houses sell by catalogue 
only and the personal equation never exists. Moreover, the 
cold analysis of the credit department, now a part of all 
large concerns, makes personal contact unnecessary to de- 
termine the risk, important as personal contact may be. 

Mercantim Credit Terms 

The terms of mercantile credit should be on an economic 
basis. They should not be longer than is needed to turn the 
goods into the next process. The buyer should pay for his 
goods as soon as he has sold them; for in selling, an instru- 



ESSENTIALS IN GRANTING CREDIT 409 

ment will arise that can be turned into money to liquidate 
the first debt. As wholesale groceries can be turned in from 
one to two months they should be paid for within that time 
and the credit term be no longer. The farmer needs longer 
time to turn soil chemicals into wheat and six months might 
not be too long for him. Retail groceries may be turned 
two or three times a month and meats two or three times a 
week, and, therefore, short credit arises; while dry goods 
would take longer, being less perishable but slower in selling, 
and subject to fashions. The cash discount is so firmly es- 
tablished that it is now a fixed policy, and this makes the 
credit term, as a rule, short. Banking credit is longer, has 
no premium on promptness, but a penalty on laxness. 



Instruments or Credit in Mercantile Transactions 

The credit instruments used in mercantile dealings are: 
(a) Book accounts. It may seem superfluous to describe 
the book account as a credit instrument, but analyzed it 
simply means that the seller delivers the goods, charges the 
buyer on his ledger, renders invoice and statement, with 
terms of sale, collects at the end of the credit term, payment 
probably being made by check, and the transaction is closed. 
No circulating credit has arisen; and until recent years no 
pledgable security came out of the operation; it was strictly 
between the two. But the seller can now avail himself of 
the proceeds of the sale by hypothecating the book account 
as hereafter described. 

The book account has no evidence on the part of the 
buyer that he agrees to the terms of the sale, except the ac- 
count stated, which is passive and not active assent. In a 
negotiable instrument, however, the maker consents to the 
time, the amount of the credit, and agrees to pay it. The 
dishonor of a book credit is not so serious a matter as the 
dishonor of a promissory note. If the book account be paid 
a few days after its due date, it is quite satisfactory, and 
the cash discount often allowed; but to allow a note to run 
over even a day is to invite protest, and protest means dis- 
credit. 



410 THE PRACTICAL WORK OF A BANK 

Book Accounts as Security 

Book accounts — open credits, dealer with dealer — are 
presumed to be settled at the end of the credit term, but are 
not rigid in their maturity as are negotiable instruments. 
They are sometimes settled by note, as in lumber, raw silk, 
etc., but generally in cash, which is obtained from the sale 
of single-name paper. They are frequently used as the basis 
of credit, by pledging with bankers, factors and "commer- 
cial bankers," who make a business of loaning on accounts 
receivable. So common is this practice that many firms have 
their bill-heads printed with the notation: "This bill assigned 

to and all payments must be made to 

them." Large and important houses in New York and 
other cities now buy these book accounts, and make advances 
in part or up to the full amount, charging in proportion to 
the risk assumed and the amount advanced. A del credere 
commission man or factor is one who insures the credit he 
opens when he makes a sale of his principal's goods, and 
guarantees the payment of the same, for which guaranty he 
receives a large fee and assumes greater risks. Some banks 
will loan on book accounts and others will not; but they 
are coming to be quite a common security. 

The methods of utilizing book accounts as security are 
two: (a) Selling outright, the buyer assuming the risk of 
collection, for which risk he charges his full toll; (b) pledg- 
ing the accounts as security, receiving only part of their 
value, the pledgor agreeing either to turn in others to keep 
the margin good, or to turn all proceeds over to the lender 
as payments are made. It has been held recently in New 
York that such an operation is in violation of the banking 
and corporation laws which forbid other institutions than 
banks doing a discounting business, and such a contract of 
sale is void. ! \ w <% 

The factor is in some cases a firm of considerable wealth, 
able to maintain a large organization, and employ a highly- 
paid credit man, and is able to borrow in the open market 
on single-name paper or by banking connections obtain the 
credit needed to carry on the discounting operations. 

The selling of book accounts is liable to gross frauds, 
and it becomes needful that the account be confirmed over 



ESSENTIALS IN GRANTING CREDIT 411 

the debtor's signature to be sure that the account is not a 
fictitious one. 

Assigned Accounts a Menace 8 

The growing practice of loaning on assigned accounts 
constitutes a constant menace to the banker whose advances 
are made on the general security of the assets, particularly 
those described as quick. The number of corporations or- 
ganized for financing in this way is steadily increasing 
and the ease with which credit can be obtained is a constant 
temptation to the small borrower to overtrade. It has also 



Business Loans. 

Manufacturers, wholesalers, outstanding ac 
counts financed, notes discounted. KOtyn. 
194 Bowery. (Bank Building.) . 

Manufacturers' and wholesalers* outstanding 
accounts financed, notes purchased. Nas- 
sau Finance. 119 Nassau. 



Merchants and manufacturers* accounts 
, notes, second mortgages. Victor Beaver 
39 East 42d. | 

Make loans' outstanding accounts, notes, bank 
books. Security Finance Co., 149 Broadway 



ADDITIONAL CAPITAL. REQUIREMENTS 
furnished to manufacturers and wholesalers; 
advances on accounts and merchandise. Con- 
fidential. Principals only. Wormser & Co., 
Commercial Bankers, 95 6th Av., N. T. City. 



ADVERTISE JIENTS IX THE NEW YORK TIMES OF CONCERNS DISCOUNTING BOOK ACCOUNTS 

given rise to a species of fraud which, unless promptly 
checked, will prove very dangerous for those who make such 
advances. 

A New York manufacturing concern with a number of 
subsidiaries recently went into bankruptcy and the active 
official disappeared from his accustomed haunts. It soon 
developed that in addition to direct loans from banks he 
had been financing his enterprises by the sale of accounts to 
two large commission houses in New York City who make 
a specialty of cashing accounts. It is alleged that concern 
"A" would ship goods to "B" and pledge the invoice with 
the commission merchant. "B" would ship the goods to 
"C," make out a bill, go to the commission merchant and 
secure a loan on it. "C" would repeat the operation to "D" 

8F. B. Snyder, Assistant Cashier First National Bank, Philadelphia, before 
Philadelphia Chapter, A. I. B. 



412 THE PRACTICAL WORK OF A BANK 

and "D" to "E" and "E" to "A" until five advances had 
been made on the same lot of goods. The skilled financier 
was later found across the Mexican border where he had 
gone, as he said, for his health. His illness must have had a 
very deteriorating effect on his memory as he was traveling 
under a name entirely different from the one by which he 
was known in New York. Pledging accounts may serve as 
a useful purpose with certain classes of merchants who can 
thus obtain funds to discount their bills when their bank 
credit is not sufficiently good for single-name accommodation. 
The discounts, however, must be very substantial as the esti- 
mated cost of this method of borrowing is from seventeen 
to thirty-six per cent. Where it is indulged in the banking 
of the borrower should all be done with the institution mak- 
ing such advances and his financial affairs should at all times 
be the subject of the closest scrutiny. 

Dating Ahead 

The dating ahead principle arose from the necessities of 
manufacture. In such lines as staples, small stocks may be 
carried, and bought as required; while in fashionable goods, 
they must be made to order and to suit the tastes of the 
buyer. Thus, in a line such as ladies' garments, samples 
are made up and taken out to the retailers for inspection, 
and orders taken months in advance of the season. Orders 
for spring goods are taken in the fall and vice versa. As 
soon as the goods are made up, they are delivered as per 
agreement, the invoice to be dated ahead. For instance, the 
goods would be delivered for the spring trade in January, 
the invoice to be dated as of March 1st, and the terms of 
credit would run from that time. Thus, a department store 
may have a sale of furs in August, agreeing that no pay- 
ments are to be made until November 1. It must either 
carry the credit itself, or pass it back to the fur manufac- 
turer. This it does by having the invoices dated as of No- 
vember 1, the term of credit running from that time, and 
it will meet its bills as the customers meet theirs. The man- 
ufacturer may in turn sell his book accounts. 

In dating ahead the buyer is not only entitled to the cash 
discount, but to interest for the unexpired time. For in- 
stance, a bill of goods is delivered on February 1. The dat- 



ESSENTIALS IN GRANTING CREDIT 413 

ing is March 1, 2/10 net 30, and the bill becomes due March 
31. If it is paid any time before March 10, the discount 
follows. But if paid, let us say, February 15, not only 
would the two per cent, be deducted, but interest at the legal 
rate for the unexpired time of the credit. 

Department stores frequently agree to date bills ahead 
to attract trade and to avoid holiday rushes. Thus, pur- 
chases made in October may be dated as of December 1, 
bringing the maturity of the bill over into the new year. 

The second form of mercantile credit is the promissory 
note, which needs no comment. It may be single-name or 
two-name, but it is a promissory note whatever the form. 
There is also the bill of exchange by which the seller draws 
on the buyer, as in grain and other basic products, raw mate- 
rial moving, as a rule, on draft with bill of lading. There 
will come to be shortly, as now obtains quite generally in 
Europe, the acceptance credit, whereby the buyer accepts 
the bill of exchange and thereby agrees to pay it at matu- 
rity, the instrument going into the money market as an 
"acceptance," and settling the book account as the promis- 
sory note now does in this country. Late reports of the 
Federal Reserve Bank show about thirty-six per cent, of 
their loans to be in the form of acceptances purchased. 

The Mercantile Credit Field 

The mercantile credit man labors in a field widely differ- 
ent from that of the bank credit man. Many of the credits 
granted in the day's work in a business house are so small 
as to require but little investigation, other than looking up 
in the agency reports, and the loss would be trifling; while 
in banking, especially in large cities, the loans are of much 
larger average. 

A business house has also the advantage of being able 
to adjust its prices to the risk, and may, in a measure, in- 
sure the credit by an* advance in prices; but the bank man 
has but one price to all and this is fixed by law. 

Moreover, the mercantile credit man deals largely with 
those in one line and can specialize, while the banker, unless 
he too specializes — and this he should not do — must know 
many. 

The giving of statements in mercantile credit is not so 



414 THE PRACTICAL WORK OF A BANK 

general as in banking credit, the information being ob- 
tained from other sources, although the statement is here 
becoming recognized as necessary also. 

Not only is the character of the credit on a less secure 
foundation as it gets nearer the final consumer, but the 
property risk is less valuable as a backbone to the structure. 
For instance, the accounts receivable of a wholesale house 
are good collateral — they have been selected; they are good 
liquid assets; but the accounts on the books of the village 
grocer are uncertain of collection, slow and highly danger- 
ous as credit risks. He has not selected his risks as care- 
fully as has the man higher up. He did not know how, and 
could not be very strict if he did. And if he borrows he 
must do so from his local bank on his general reputation. 

The Enormous Cost oe Retail Selling 

All well-managed concerns analyze their business. De- 
partment stores do so for each department, carefully analyz- 
ing prices, mark-ups and mark-downs, sales, discounts and 
expenses. Conditions vary so greatly that one merchant 
cannot guide himself by the experiences of another. One 
may pay a rent of $50,000 and the other but half that sum, 
and both sell to the same trade. Three stores are men- 
tioned as selling approximately $1,500,000 yearly, one 
paying $65,000 rent in Indiana, one $45,000 in New York, 
and one $30,000 in Ohio. One pays ten times more for in- 
surance than does the other. Obviously their selling prices 
for the same articles will vary. 

One store will consider a gross profit of thirty-three per 
cent, ample; while others will be satisfied with less. The 
mark-ups range from twenty to fifty per cent., depending 
upon the department, but the average is from thirty to 
thirty-three per cent. 

When you go into a department store and select a pair 
of gloves and leave your address, and expect to find them 
when you arrive home for dinner, you give little thought to 
the cost of placing those gloves in your possession. You 
have become so accustomed to sendee, quick, efficient and 
accurate, and to include the little things of life, that you 
take it as a matter of course. 

Without much argument it must be apparent that to 



ESSENTIALS IN GRANTING CREDIT 415 

conduct a large establishment, with thousands of clerks, ex- 
pensive rent, quick and extensive deliveries, is costly. And 
every purchase must bear its proportion of that cost; and 
the consumer pays. The cost of the article is but a part of 
its selling price. The shopper comes into contact with a 
salesperson, and forgets the vast army of employees out of 
sight, but no less necessary to the smooth working of the 
machinery. There must be the buying force, the stock 
force, the selling force, the credit force, the accounting 
force, the delivery force, and the supervising and executive 
force. And your pair of gloves must pay something to each. 

The cost of doing business has increased so fast of late 
years that it is officially stated that large concerns are satis- 
fied to make as net profit their cash discounts. 

In a pamphlet issued by Ernst and Ernst, certified 
public accountants, New York, the pair of gloves referred 
to are thus analyzed to show the distribution of cost of 
sale : 9 

COST OF THE SALE OF PAIR OF $1.50 GLOVES. 

.6667%— Manufacturer's price $1.00 

.0067%— Freight, &c 01 

.08% — Salesperson 12 

.02% —Rent 03 

.0067% — Insurance and taxes 01 

.02% — Advertising 03 

.0533%— Office expense 08 

.0666% — General store expense 10 

.04% — Delivery expense 06 

$1.44 
.04% —Profit 06 

100.00% $1.50 

Frauds in Mercantile Credit 

Great frauds are possible in mercantile credit because 
of the ease with which statements and accounts may be jug- 
gled and frauds covered. This is particularly true of mer- 
chandise, where a few figures, more or less, are easy to 
make and hard to discover. The picture was recently pre- 
sented in court of a prominent merchant compelling his book- 
keeper to inflate the merchandise account in order to show 
a profit where a loss occurred. In a big concern, handling 



9New York Times, April 6th, 1914. 



416 



THE PRACTICAL WORK OF A BANK 



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ESSENTIALS IN GRANTING CREDIT 



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418 THE PRACTICAL WORK OF A BANK 

millions of dollars' worth of goods yearly, and whose stock 
runs into the six figures, to add a few ciphers here and 
there to the inventory is not difficult, and only a physical 
revaluation will disclose the exact state of affairs, although 
an expert accountant could verify an inventory to a fair de- 
gree of certainty without this lengthy process. The amount 
of goods on hand at the beginning of the term, plus the 
purchases, minus the sales, must equal the present inven- 
tory; but if accurate records are not kept, or other frauds 
indulged in, it is not easy to detect an irregularity, and only 
re-inventory will accurately determine conditions. 

The banker must pin some faith in the statement of con- 
dition, and cannot always require an expensive and ex- 
haustive audit for credit purposes, and the remedy would 
seem to be to severely penalize false statements. The ad- 
vent of the Federal Reserve Banks and the credit opera- 
tions outlined in their ruling of November 10, 1914, indi- 
cate a step in the right direction; for it is the obvious pur- 
pose to require statements of all firms whose paper is of- 
fered for rediscount, attested by oath, and it will doubtless 
follow that certified audits will presently be required. Clear- 
ing-houses have already taken such steps as a matter of good 
banking policy. 

The uncertainty of mercantile credit and the frauds pos- 
sible in such lines have resulted in credit bureaus, connected 
with all the leading industries that specialize in the credits 
of their own trade. 

These credit bureaus have such complete reports of the 
men engaged in the particular line that a detailed history of 
the individual may be obtained upon request. They keep 
close watch upon the operations of the men in the trade, 
and follow up bankruptcies and assignments. For instance : 
the best hat manufacturers sell their product through about 
a dozen commission houses. These commission men work 
in harmony, employ an actuary to whom all orders and 
payments are reported. Having a record of past pur- 
chases and payments, the actuary is able to check the busi- 
ness operations of the trade. He will know if a merchant 
is buying beyond his means. Business is not spasmodic, 
but of slow growth, and a sudden, heavy order may be 
the forerunner of a failure. The actuary will detect the 
dishonest buyer, perhaps in time to report him as unde- 



ESSENTIALS IN GRANTING CREDIT 419 

sirable. The way a man takes his discounts, cancels orders, 
returns goods, etc., may all be known because of the har- 
mony in the central credit bureau. 

These credit bureaus go into the moral side of a man 
closer than the large agencies are able to do, for they cover 
a special field, and can concentrate. They know the field, 
the various towns and cities, from their particular view- 
point. For instance, in a city like Schenectady, N. Y., em- 
ploying large numbers of men, hats and men's wear in gen- 
eral would find a profitable field; but if a strike should 
occur in the General Electric works it would soon affect 
every line catering to men. Thus, the special credit bureau 
follows economic conditions, and advises its clients accord- 
ingly. Likewise a failure of crops in an agricultural sec- 
tion will have its effect upon certain lines. 

Associations of credit men are operating local credit bu- 
reaus which check local credits, and interchange with other 
local credit bureaus, so that first-hand information may be 
had of any merchant in any town supporting a credit man's 
association. 

In Philadelphia there are eighteen jobbing houses which 
handle a product of such bulk that the retailer, in order to 
make a profit, must purchase in his home market, as freight 
is practically prohibitive. These eighteen houses have an 
association which conducts a small mercantile agency con- 
taining the names of all purchasers in this particular line. 
Each member furnishes the agency at regular intervals with 
a statement of the retailer's standing with him, which is in 
turn transmitted to the other members. In this way it is 
possible to keep a complete check on all houses in this fine 
and losses from bad debts can be practically eliminated 
unless the jobber goes against the unfavorable experience 
of his associates. 

The Mercantile Statement 

The property of a mercantile dealer can be correctly as- 
certained only from his statement, and this is coming to be 
the focal point of all credit operations. Not what the man 
says he is worth; not what he seems to be worth; not what 
his bank thinks he is worth; but what he is worth as tested 
by an audit made by an independent party who knows how, 
and does it with full knowledge of accounting principles. 



420 THE PRACTICAL WORK OF A BANK 

No man can go into a store and look around, and say: 
"This man is good for a thousand dollars' credit." The 
goods may be on consignment, or mortgaged, the book ac- 
counts large, the bank account empty, the merchant's house 
mortgaged to the limit, his garage bill unpaid, his tailor's 
bill a year overdue; and unless the property is set forth in 
cold figures, no man living can judge the risk advisedly. 
Moreover, the merchant must be required to keep books. He 
must know what comes in; what goes out; if he gets his 
pay, and from whom; what his profits ought to be, and 
what they are; how much his sales are, and what the cost 
of selling. 

The average merchant guesses at his selling price. The 
cost, plus the freight, plus*what he thinks he ought to get, 
means his selling price, regardless of other conditions. 
Competition often sets the price, and the merchant paying 
high rent must compete with the one paying a low rent; 
likewise standardized goods must be sold at fixed prices ir- 
respective of the cost of handling. A drug store on Sixth 
Avenue, New York, can afford to sell a proprietary article 
cheaper than one on Fifth Avenue. It may do more busi- 
ness at less expense and can afford to take close profits; 
while the other has high rent and other expenses in pro- 
portion. 

The average merchant knows nothing about his turn of 
stock. He is satisfied to keep it up, make a living, pay his 
bills, but cares not for the process by which the results are 
achieved. Increased sales do not always mean increased 
profits unless the same volume can be handled at the same 
cost. 

How to Figure the Turn-Over 

While the final net profit of retail dry goods stores is 
small, this is often offset by a large volume of sales as 
compared with the average amount of merchandise on hand 
throughout the year. This is what is known as the "turn- 
over," and the thing all merchants are striving to make as 
high as possible. A high turn-over indicates that the stock 
is moving well and that good judgment is being used in buy- 
ing and selling, while a low turn-over shows the stock is not 
selling properly and that obsolete stock may be accumu- 
lating. 



ESSENTIALS IN GRANTING CREDIT 421 

The amount of turn-over, of course, varies with different 
departments in the same store and with different stores, de- 
pending on their location with respect to the source of 
supply. 

Merchandise subject to change in styles is turned over 
much more often than staples. For example, millinery and 
ladies' ready-to-wear clothing are usually turned from six to 
ten times per year, while carpets, linens, dress goods, etc., 
are commonly turned only two or three times. 

The correct method of computing the turn-over is an im- 
portant matter and is often improperly determined by many 
merchants. The proper way to do this is to divide the aver- 
age monthly stock at retail into the sales at retail or, what is 
virtually the same thing, by dividing the average stock at 
cost into the sales at cost. Some merchants incorrectly 
divide the stock at retail as taken at inventory periods into 
sales at retail or, what is worse, divide the stock at cost at 
inventory periods into sales at retail. This latter method 
would give a turn-over at least fifty per cent, more than the 
real turn-over. 10 

The following on the subject of turn-over is well worth 
quoting: 11 

"My judgment of the great importance of the turn of 
stock and the lack of appreciation by the merchant is such 
that I desire to make my point as impressive as possible and 
I will give you a few illustrations. Now, you who are not 
merchants would be surprised how few merchants realize the 
importance of this turn of stock and it is so simple that I 
know you will agree with me that it is really the A B C of 
business. Take an illustration which I have sometimes given 
to the college boys: 

"A young man had $5,000 and wanted to go into the 
men's furnishing business. He came to me for advice and I 
said: 'You take $2,500 of that $5,000 and bury it in the 
ground, then take $2,500 and buy goods.' Now, it is very 
clear that the $2,500 in the ground is inactive. In other 
words that $2,500 invested in goods has got to be active 
for both. He is worth $5,000, $2,500 of which is dead, in- 

loErnst & Ernst, official auditors and systematizers, the National Retail 
Pry Goods Association, in the "New York Times." 

nE. M. Skinner of Wilson Bros., Chicago before Chicago Chapter, A. I. B. 

28 



122 THE PRACTICAL WORK OF A BANK 

active, does not move. The $2,500 of active, new, salable 
goods is doing the work for the $5,000. 

"Take the United Cigar Stores. I have used this illus- 
tration a great many times and I have not as yet received 
any letters from the United Cigar Stores putting me on the 
payroll and I never talked with any of their officials to know 
if this is their system. 

"I have been in the habit of going into the store near our 
establishment and buying a certain cigar. Well, just assume 
for the sake of argument that I buy twenty-five of this cigar 
once every two weeks. That would be twenty-six boxes of 
cigars I would buy of this store every year. Now, the clerk 
always brought down three boxes of cigars of this particular 
brand. I said to him one day: 'Is this your entire stock of 
this cigar?' He said: 'Yes, sir.' That is the best illustration 
I can give you. Here is one store that sells one customer 
twenty-six boxes a year. In other words, they turn the stock 
of that one cigar over eight times a year. Now, you know 
what that means. It means that on every dollar invested in 
that cigar they make eight profits, because they turn it eight 
times. As I say, I don't know, but I am positive this is their 
system. The sale of that box of cigars goes down on a sale- 
sheet and I will bet you that their sale-sheet of to-day is 
their order-sheet of to-morrow morning, and when that 
great truck comes around in the morning they bring in that 
box of cigars and it is put in there with the other two re- 
maining." 

Granting Mercantile Credit 

In the granting of mercantile credit, all the elements 
that enter into personal credit are desirable and even neces- 
sary. First, we must have an honest man. He must have 
demonstrated this by his past conduct. Then we must have 
an able man, and this we can easily determine by his past 
and present performances. He must have demonstrated 
that he can run a business — for mercantile credit is granted 
to run business and not to furnish a home or keep an auto- 
mobile. We can tell what sort of trader he is by his methods 
of advertising, credits and general aspect of his business. A 
store that is well located, well arranged and neat, stock fresh 
and well selected, employees loyal, well paid and fairly treat- 
ed, is presumably prosperous. We can tell his credit methods 



ESSENTIALS IN GRANTING CREDIT 423 

by his accounts receivable. This should be the focal point. It 
matters not how much goods he sells, if he doesn't get his 
pay, of what avail? Anyone can sell goods — only the good 
business man can get the money for them. Too liberal credit 
is conducive to large sales and slow pay. Does he pay his 
personal debts promptly? Does he live within his means and 
does he always take his discounts? Does he borrow at the 
bank, and if so, how much? Does he bear a good reputa- 
tion in the trade ? What is the worth of the concern ? How 
much capital? Assets minus liabilities equal proprietorship, 
and unless the equation shows an overplus of assets, the 
business is insolvent, and unless there is sufficient capital 
success cannot follow. Business failures, in the main, are 
caused by lack of capital. 

Why Men Fail 

The causes of business failures have been analyzed from 
time to time by the mercantile agencies, and the reasons are 
stated in percentages as follows: 

Per cent. 

Lack of capital 29.7 

Incompetence . 30.2 

Inexperience 4.6 

Bad credits 2. 

Competition 1.9 

Fraud 10.3 

Neglect 2. 

Personal extravagance .7 

Speculation .8 

Other causes 17.8 

A private investigation of the causes of 500 partial or 
total collection losses resulted in finding the causes of fail- 
ure to be similar, as follows: 

Per cent. 

Lack of capital 29.5 

Incompetence 24. 

Bad credits. 4,4 

Heavy expense 3. 

Poor location 2.2 

Expansion 2. 

Fraud 4 

Neglect 4] 

Extravagance 4.9 

Speculation 2.1 

Intemperance 2. 

Other causes 11.60 



424 THE PRACTICAL WORK OF A BANK 

The Development of the Retail Store 12 

It is illuminating and instructive to look back for a mo- 
ment and follow the development of the retail store in its 
relation to this most important matter of retail credit. In 
the early days of our retail business a store was started to 
supply the demand of the community for certain necessities 
of the people. If a town needed a store, a general store was 
started. It carried everything the community needed. Later 
if there became a demand for a more complete line of dry 
goods, or clothing, a separate store was started and so on 
along the line of specialization. If the community grew, 
more stores were started of the same kind, but only as the 
demand made them or seemed to make them necessary. 
These stores catered to the actual needs of the people. 

As time went on and our present-day methods of intense 
living came into existence, no longer was it sufficient to sim- 
ply fill the demand, but a demand was created, and then that 
great modern force known as advertising came into exist- 
ence. It became the duty of advertising not so much to in- 
dicate why we should use this or that necessity, but to show 
us why this or that was a necessity, until to-day we are all, 
those of small means as well as those of large (and unfortu- 
nately those of us of small means are the more easily per- 
suaded) just as sure we need a talking machine or an auto- 
mobile as we are we should use Ivory Soap, Old Dutch 
Cleanser, or one of Heinz's 57 varieties, and so it goes along 
the line of merchandising, even as the advertising expert will 
tell you, first attention, then a desire for things is created. 

Now, if this desire was created only among those who 
could afford the article, well and good, but like the rain, it 
falls upon the just and unjust, and those who cannot af- 
ford become even more intense in their desire than their more 
prosperous brothers. And so we have our present-day con- 
dition of the over-expansion of abuse of retail credit until it 
has in reality become a menace not only to the merchant and 
to the individual, both man and woman, but to the commu- 
nity itself. What would happen if all your merchants insist- 
ed upon all their accommodation credit accounts being paid 
promptly in thirty days? 

12E. M. Skinner, of Wilson Bros., Chicago. 



ESSENTIALS IN GRANTING CREDIT 425 

Another of our modern methods is the competition in 
credit as well as merchandise. In the strife for business it 
is not only the goods and the price but the willingness to 
trust. This is one of the great evils of present-day 
methods, an evil that like other evils is difficult at first, easier 
afterwards, until later on we become unconscious to the re- 
sult of it. And it has seemed to me that with the man who 
wants to "feather our nest with no cash down," the piano 
dealer who will sell a $150 piano for $250 and take $10 
down and monthly payment leads. The legitimate retail deal- 
er is somewhat to blame for permitting his charge accounts 
to grow until they consume one-half, two-thirds or perhaps 
all of his capital and at the same time educate the man, or 
more particularly the woman, to go in debt beyond his or her 
means or immediate ability to discharge. Unless your capital 
is sufficient you are losing your discounts, you are paying in- 
terest, you are slow in meeting your obligations, you are 
allowing your credit or at least, your methods to be ques- 
tioned and you are building up an asset of so questionable a 
character that if you desired to sell your business the pur- 
chaser would not take it. 

Profits 

In a day of competition, business can no longer be done 
by hit or miss methods. The business man must know what 
his goods cost to manufacture; what to market. He must 
know details from a scientific standpoint. It no longer suf- 
fices to know what his rental charge is — he must know how 
much of that charge belongs in a certain article. The prof- 
its of to-day are made from the wastes of yesterday. And 
the wastes of to-day will be the profits of to-morrow. It is 
one thing to make profit from waste and another to waste 
profits. 

A perfectly conducted business should make a legitimate 
profit on every dollar of merchandise sold; but as we are 
all human and must make mistakes, as the public is fickle 
and styles change all too quickly, there is reason for a sale 
at the end of a season of odds and ends of merchandise that 
the merchant has not been able to properly judge as to its 
salability; but for the loss of profit on sales before the end 
of the season, for the selling of a large proportion of the 
season's purchase in this manner is commercial suicide. The 



426 THE PRACTICAL WORK OF A BANK 

merchant must have profit or he cannot succeed — he cannot 
charge an exorbitant profit on some goods to make up his 
loss of profit on others — he must find some way to sell the 
bulk of his goods profitably or he will surely drop by the 
wayside as one of the unfit. We cannot do business solely 
on "bargain sales." 

Speaking of the profits that attend merchandising, 
Messrs. Ernst and Ernst say : 

"From a wide experience in many retail dry goods and 
department stores we have accumulated a large amount of 
data on expense of operation. It would not be satisfactory 
or fair to attempt to compare the results of various stores 
with respect to the individual items on account of the vary- 
ing conditions. 

"We have, therefore, picked twenty-five stores in differ- 
ent cities throughout the United States and find the average 
per cent, of gross profits (total net sales less cost of inven- 
tory value of goods sold), per cent, of net profit, and per 
cent, of overhead expenses to net sales are as follows: 

Gross Overhead Net 

i ) Profit. Expenses. Profit. 

1 ' P.C. P.C. P.C. 

Average 25 stores 30.42 23.84 6.58 

Highest single store 35.10 28.00 10.66 

Lowest single store 27.33 18.02 3.50 

"From the above it will be seen that the average cost of 
the merchandise was 69.58 per cent, of the net sales, .and 
that the cost of doing business was approximately one-third 
of the original cost of the merchandise. In other words, 
when a customer buys an article for one dollar, sixty-nine 
cents goes to pay for the cost of it and twenty-three cents 
pays for the expense of the merchant in supplying him with 
the article. 

"The modern retail dry goods store of to-day, conducted 
along the right lines, has its business divided into many dif- 
ferent departments, each being conducted independently, so 
to speak, from the others. The departments are little stores 
in themselves. This plan is followed so that the gross and 
net profit or loss can be ascertained as to each department. 
The merchandise, when purchased, is charged to the depart- 
ment to which it goes, the overhead expenses are pro rated 
over the various departments, and likewise the sales are kept 



ESSENTIALS IN GRANTING CREDIT 427 

separate. This is the only method by which a merchant can 
tell whether a department is profitable or not. The percen- 
tages shown above, of course, refer to all departments taken 
as a whole. 

"It must, of course, be understood that the gross profit 
finally realized is usually much less than the original gross 
profit at which the merchandise is marked up to sell. The 
losses on account of markdowns, special low-price sales, loss 
of merchandise, stolen goods, etc., are all absorbed in the 
final gross profit as determined for the year/ 



"1! 



Losses 

The losses in retail credits as ascertained by an investiga- 
tion of 1,000 stores covering various lines were as follows: 

Per Cent, 
of Net Sales 

Furniture 1-94 

Groceries •4'7 

Clothing 34 

Vehicles -33 

Hardware -31 

Jewelry .23 

Dry goods .21 

Department stores .19 

Drugs .18 

Shoes 11 

Variety goods None 

The secretary of the Retail Grocers Association of Kan- 
sas City figures that a loss of one per cent, of sales is nor- 
mal for an $18,000 a year grocery. 

The most successful methods of reducing mercantile 
losses used by 286 merchants are: (1) A distinct under- 
standing as to terms and limits of the credit ; ( 2 ) individual- 
izing customers — that is, knowing the man. One credit man 
states that he met one of his customers for the first time at a 
meeting of creditors; but if he had met him sooner there 
would have been no meeting of creditors; (3) cooperation 
with trade and trade bureaus; (4) monthly collections and 
good collection methods ; ( 5 ) care in accepting new accounts. 

Business Risks 

Business is divided into four main groups: Manufactur- 
ing, wholesaling, jobbing and retailing. The risk the man- 



isNew York Times, April 13th, 1914. 



428 THE PRACTICAL WORK OF A BANK 

ufacturer runs is that he may not get back the cost of his 
material plus the cost of manufacturing, and, therefore, lose 
not only his profit, but the capital invested or borrowed. He 
must have a good cost system in order to know what it costs 
to produce his article. Then he must sell it. It may be he 
manufactures an article that is in steadv and wide demand, 
and the profits, while they may be small, are steady and 
certain. But if he manufactures an article subject to chang- 
ing fashions, the whims of the season — novelties — a change 
of public opinion may seriously affect his business. The 
manufacture of clothing, especially that for women, which 
is highly a matter of fashion, is precarious when the styles 
are radical and the changes come suddenly and without 
warning. The weather, the seasons, crops and so many 
factors enter into the consideration of a manufacturing 
credit risk that it is perhaps the most difficult class to judge. 
Labor strikes, the tariff, loose credit methods, depreciation 
of plant and machinery, and improper bookkeeping methods, 
are all factors to be considered in manufacturing credit risks. 

Manufacturing may be divided into two general classes : 
The manufacture of goods for consumption and the manu- 
facture of goods for production. The manufacture of con- 
sumptive goods divides itself into goods for necessities, goods 
for comfort and goods for luxuries. The first class would 
include such products as meat, cereals, canned goods, cloth- 
ing, etc. — in fact anything to eat or wear that is not dis- 
tinctly a luxury. Such articles as perfumes and toilet ac- 
cessories are distinctly luxuries and could well be spared to 
a very large extent. As comforts may be included all those 
things useful but not necessary, which add to the conven- 
iences of life. 

It is obvious that an article such as meat will have a 
wide and constant demand, and a stock of such could be 
quickly turned into money. "Packing-house paper," as it is 
called — meaning the commercial paper issued by the great 
meat houses — is highly regarded everywhere. Likewise 
groceries of staple character which are, like meat, in con- 
stant and widespread demand. Such articles as canned 
goods and food products in general that will not spoil, cof- 
fee, rice, etc., are good security for loans from a realization 
standpoint; but perishable articles, such as butter and eggs, 
vegetables, while good as collateral for bill-of -lading loans, 



ESSENTIALS IN GRANTING CREDIT 429 

are not of sufficient durableness to make them good for a 
long-time loan. Wholesale hardware is a staple article, in 
constant demand, and not perishable, and, therefore, well 
regarded. Bankers favor print cloths, staple fabrics, wool- 
ens, white goods and staple lines of textiles. Anything that 
is a necessity of life is a good foundation for credit and any 
well-managed concern dealing in such generally a good risk. 
Production goods are such articles as are necessary in 
the economic development. Such would be electrical goods, 
farm machinery, goods used in construction work, and those 
articles which are used to promote industry and efficiency. 
But business depressions affect all lines of activity, and even 
though the article be in the class of productive goods that 
have wide and steady consumption, depressions will natural- 
ly curtail production and competition will cut profits. Thus, 
a lull in building will have its effect upon electrical goods, 
elevators and other articles entering into construction work. 
Likewise furniture, while a necessity, will have its dull sea- 
sons when the economies of the people cut down expendi- 
tures to low ebb, for a large part of house-furnishing goods 
may well be classed as luxuries. 

The Wholesaler and the Retailer 

The wholesaler is not burdened with a plant to maintain, 
machinery to wear out, a class of labor that is always crying 
for more wages, but he must have an expensive selling or- 
ganization. The wholesaler can buy even seasonable and 
fashionable goods as wanted, and need not stock up heavily. 
The retailer is last in the list. More and more business is 
getting down to a cash basis, and with the extension of the 
department store idea, and the advantages of cash dealings 
growing in popular favor, the retailer as a credit risk is com- 
ing to be better understood. Moreover, his assets are largely 
quick assets — merchandise and accounts receivable. 

In the chain of merchandising the greatest risk is taken by 
the manufacturer. Some credit men eliminate the manufac- 
turer and loan to him, if at all, only when they have gone 
carefully into his affairs and become satisfied of his stand- 
ing. One New York bank is said to have an officer who 
spends most of his time going around among manufacturers 



430 THE PRACTICAL WORK OF A BANK 

and inspecting their plants. Photographs are taken and the 
affairs given most careful study. 

Standards 

Banking credit standards are of the highest, and the test 
put by the banker is more severe than by the merchant. The 
latter wants trade; he does not want to lose a customer; his 
profits are larger than bank profits, and he can afford to 
assume risks ; first, because it is his own money, and second, 
for the profit that eventually attends. Moreover, the mer- 
chant-creditor may extend the credit while the banker- 
creditor cannot. 

When the book account is due it may be extended, or 
allowed to run until by the slow process of the law it is col- 
lected; but the bank cannot extend its debts. They are pay- 
able on demand, and it cannot settle one debt by incurring 
another as does the merchant, but it must pay or suspend. 
Under the Federal Reserve Act, banks will now be able to 
turn good mercantile credits into bank-note credits, and as 
long as they keep their paper in conformity with the rulings 
of the Federal Reserve Board, can depend upon being able 
to quickly turn good assets into circulating credits. 

The Credit Department 

The division of credit which will particularly engage our 
attention, however, is that of bank credit. A bank has been 
likened to the human body, with the executive force as its 
head, the tellers its hands, the runners its legs, and further 
likenesses which imagination will readily supply. The life 
blood of this body is its loans and investments, and the credit 
department is analogous to the lungs and heart which keep 
the loans pure, liquid and circulating. To properly perform 
these functions, the credit department must be properly 
equipped and properly directed. 

In the early days of American banking, loans were 
largely local. The cashier was chosen for his knowledge of 
local conditions. The bank made its loans with the expecta- 
tion that they would run for a long time, and were often se- 
cured by real estate mortgages, and were in the nature of 
borrowed capital rather than working capital. The home 



ESSENTIALS IN GRANTING CREDIT 431 

demand absorbed the loanable funds and a bank rarely 
thought of going outside its immediate field for investment. 
But with the development of the country and the concentra- 
tion of wealth, and the growth of banking resources, wider 
fields had to be found both for the borrower and the lender, 
resulting in the credit department and the commercial paper 
broker — the one to buy and sell the paper and the other to 
pass upon its quality. 

Twenty years ago, the credit department was unknown, 
but to-day it is part of the organization of every well-man- 
aged bank, with its officer in charge, files and elaborate in- 
formation concerning not only its borrowers, but large con- 
cerns all over the country. The machinery of the credit de- 
partment depends upon the size of the bank and the scope 
of its activities, the country bank needing less elaborate ma- 
chinery than the city bank which furnishes information to its 
thousands of correspondents. 

The Bank and its Correspondents 

Elsewhere it has been stated that the competition among 
the large banks for out-of-town accounts is keen. It is — 
extremely so. Most of the large banks have men who do 
nothing but follow up prospects and keep in touch with cus- 
tomers. If a new bank is proposed, as soon as the fact be- 
comes known — and sometimes before it becomes public 
property — the machinery will begin to move to get that 
account. 

The bank will have its representative busy himself imme- 
diately, and he will offer to see the bank through its organ- 
ization period, help it select its books of accounts, attend to 
its affairs in Washington, if it be a national bank, get it a 
cashier, and altogether be a "big brother" to it until it can 
walk alone. And where banks are organized every day by 
men who have no banking knowledge it becomes needful that 
some guiding hand be at the helm to steer the new ship safe- 
ly. Herein the big bank comes into its own. It knows just 
what to do to get the charter, to buy the bonds, lodge them 
for security, make the records, open the books, lay out the 
banking room, and in a thousand different little ways comes 
to the rescue of "the bank that would be." It may be friend- 
ship that gets the account, but more often it is service. And 



432 THE PRACTICAL WORK OF A BANK 

this service is real, helpful and to the point, at the time when 
it is most needed. 

The city bank not only assists in the organization of the 
country bank, makes loans 15 and keeps securities for it, but 
the principal service to its correspondents is the furnishing 
of credit information. It places its credit files at the com- 
mand of its clients freely. It will recommend paper, buy it, 
and attend to its collection, all gratis, as part of the service 
rendered in return for the account. It, therefore, becomes 
necessary to have extensive credit facilities if it would give 
good service, and this it does. 

Credit Information 

The credit department is a bureau of information. It 
gathers information, classifies it and presents it when needed. 
It does not, as a department, as a rule, pass upon the loans, 
but furnishes the credit information that is essential to the 
granting of credit. The methods and the machinery may 
differ slightly in different banks, but the principles and the 
modus operandi are the same in substance. The information 
is generally kept in envelopes or folders, all data concerning 
one individual or corporation being filed together. 

The information that finds lodgment in the credit de- 
partment consists of: (a) The information furnished by the 
borrower, both direct and indirect ; his statement of condition, 
preferably for a series of years, and other information con- 
cerning him that the credit department may obtain through 
conversations with him and reports concerning him. 

(b) Information gained through the "trade," meaning 
the business concerns with which the party does business. 
This includes the promptness with which he meets his bills; 
whether he takes his discounts, and his general reputation as 
a credit risk, from a mercantile standpoint. 

(c) Information gained from banks that have dealt 
with the concern, and especially in the fine of loans and 
discounts, and as a depositor. 

(d) Mercantile reports from the great reporting agen- 
cies, Dun and Bradstreet's. 

(e) Miscellaneous information gleaned from various 

i^See "Loaning the Bank's Money," page 242. 



ESSENTIALS IN GRANTING CREDIT 433 

sources, such as newspaper reports of judgments, assign- 
ments, bankruptcies and other published information that 
affects the credit standing of the party. 

A record of the past performances of the borrower, his 
habits, his associations, his business record, is important ; also 
a record of his average balances, 16 his average borrowings; 
his promptness in paying ; whether or not his paper has gone 
to protest; how much credit has been asked for and how 
much granted. If he issues paper on the market, this will 
be known, through whom, in what amounts, and how it is 
regarded in the banks handling it. 

To get information as to his balances and borrowings on 
cards the method in use in some banks is to fix some date in 
the month when the work of the bookkeepers is liable to be 
the lightest, and have the credit department on this day send 
the cards to them. As soon as the information is filled in, the 
cards are returned to the credit department. In some of the 
large banks in New York where balance ledgers are kept, it 
is the custom for a man from the credit department each 
month to place the information on the cards, getting the 
average balances from the balance ledgers, the discounts 
from the discount department and the loans from the loan 
department. One card when completely filled will contain 
the monthly and yearly average balances for ten years on one 
side, and on the front the maximum and minimum loans and 
discounts and information for about ten years. 

How Credit Information is Kept 

Credit information is best kept in manilla folders such as 
used in filing letters, these being numbered, with the name 
on the outside. A digest of the statement is generally made 
on a form provided for that purpose, for the sake of uni- 
formity and ready reference. This gives only the main facts 
in round figures. This appears first, the other information 

is"Most modern banking institutions, especially in the well settled sections 
of the Atlantic seaboard, have adopted a ratio of balances to loans which they 
expect the borrower to maintain. It is ordinarily as one is to five. This pro- 
portion was fixed in the same manner as the 25 per cent, reserve which banks 
were expected to maintain. Both percentages are based on the experience of 
credit grantors which has proven that one dollar in cash will support a credit 
structure of from five to eight dollars. The maintenance of these balances is, 
in a measure, a check against over extension of credits, and provides a reserve 
against liability for the customer." 



134 THE PRACTICAL WORK OF A BANK 

following in uniform order. The folders are indexed as to 
names in a separate drawer. But if the volume of credit 
names is not large the folders might be filed alphabetically. 
Inasmuch as credit information is cumulative, and becomes 
more complete and, therefore, the more valuable, it is need- 
less to add that the information should be safe from fire. 
The credit files might be classified into "Own customers," 
"Paper offered in the market" (names being obtained as of- 
ferings come in) , and "Others," such as prospects, large 
firms in the locality, etc. And if a bank discounts as a 
steady proposition for certain correspondents, it will have a 
file for such firms as it will accept for rediscount. 

The Federal Reserve Bank proposes to have a central 
bureau of credit information, to assemble information con- 
cerning all large borrowers whose paper is offered for re- 
discount. 

Classification of Risks 

Credit department work bears endless classification 
and sub-classification, and extensive data can be obtained 
for the guidance of the officers, by classifying the paper 
held. The different lines of industry that are included in 
the bank's borrowings may be given a page or section in a 
loose leaf ledger, and the paper of the different firms com- 
ing under that classification fisted as to amount bought, 
amount paid and balance for each month, the total being the 
amount outstanding against that particular fine at any one 
time. A classification may also be made of paper held in 
various sections of the country so as to scatter the risks 
geographically. 

It is also suggested that banks keep a record of the in- 
quiries coming in as a guide for future information. For 
instance, a bank answers an inquiry along certain lines, and 
if this inquiry is listed on a card, it would be a clue for an- 
swering similar inquiries in the future. 

Some banks run a statement tickler, to keep track of 
when statements are made by firms, or when audits are due, 
and thus keep their statements up to date ; but the same pur- 
pose can be accomplished by running through the statements 
on file and bringing down to date any showing a year's age. 



ESSENTIALS IN GRANTING CREDIT 435 

The Credit Man 

The man who presides over this particular branch of the 
banking business must have many and varied qualifications. 
He must know men ; he must know business. He must have 
a wide knowledge of how business is done, the terms of credit 
and the trade secrets. He should be analytic. He should 
understand accounting. He should know the law. He 
must be an observer, both of men and events. He must be 
systematic and conservative. He cannot afford to be reck- 
less. 

Probably the first essential is a healthy curiosity, which 
leads him to inquire into and ascertain the reason for condi- 
tions which only serve to excite the passing comment of the 
ordinary observer. To this must be added something of the 
traits of a Sherlock Holmes — well-trained observation, de- 
ductive skill and the ability to draw accurate conclusions. 
There is undoubtedly an intuition developed by the credit 
man which is sometimes called "credit sense." Some fortu- 
nate ones may be born with this invaluable aid, but it comes 
to the ordinary student only by the consideration of count- 
less cases and by arriving at conclusions through painstaking 
analysis. 

The credit officer is brought into direct contact with the 
executives; his work is under their eye and gains immedi- 
ate recognition. He not onlv meets men, but learns business 
as a broad science, and in a few years has a large fund of 
valuable information. While his work may be pressing, it 
is varied, so that the grind that obtains in many departments 
of the bank's work is not manifest here. 

On one of the clay tablets of the Babylonian period, re- 
cording the business transactions of the time, there is an in- 
scription to the effect that "In the month of Ab of the first 
year of Neriglissar, King of Babylon, I (Belilit^ sold Ba- 
zuzu, my slave, for half a mana, five shekels of money, to 
Nabu-akhi-iddin, son of Shula, son of Egibi. I took his 
note, but he has not paid the money," showing that even in 
those days bad credit risks were in existence and good credit 
men necessary. 



436 THE PRACTICAL WORK OF A BANK 

Losses Expected 

In mercantile transactions each sale carries a profit, and 
if the losses are kept within bounds (one-quarter to one-third 
of one per cent, of the sales) the merchant is satisfied. He 
must take risks in order to make profits; and if he accepts 
only those orders which will surely he paid promptly and 
without effort, he will lose much valuable trade. He ex- 
pects losses, provides for them and accepts them as inci- 
dental to the business. The banker does not expect losses; 
he does not arrange his prices with losses in view, and en- 
deavors to avoid them entirely. Moreover, the merchant is 
dealing in goods to which he has title and the losses are large- 
ly his own losses ; whereas the banker is lending money which 
belongs to other people, and which he has obligated himself 
to pay on demand. 

The Essentials of a Good Loan 

Good credit is the bedrock of business success; poor 
credit is the quicksand of disaster. As a general statement, 
that credit is good which is based upon an exchange of com- 
modities. The only exceptions are those loans which are in 
the nature of an accommodation, and yet have behind them 
the strength and financial soundness of one whose name and 
credit standing are sufficient to offset the lack of an ex- 
change in values. 

It is no function of a bank to furnish its patrons with 
permanent working capital, and good banking credit is based 
upon loans made after due consideration of the borrower and 
his standing, and supported by collateral, whether pledged 
or not, that is subject to prompt and full liquidation. An 
authority on banking states that a well-managed bank should 
have twenty per cent, of its investments in high-grade secu- 
rities ; twenty per cent, in commercial paper which it is under 
no obligation to renew, and purchased in the open market; 
and sixty per cent, in loans to its customers. 

The bank must meet its obligations as the merchant 
meets his — by the maturity of its credits ; and the credit that 
does not promptly redeem itself is unsound. The greatest 
measure of safety in the credit system lies in the fact that 
no great part of the outstanding obligations will have to be 



ESSENTIALS IN GRANTING CREDIT 437 

met at any one time. Experience has proven this beyond 
peradventure, and when a quick demand for unusual re- 
demption occurs, panic results and the credit system col- 
lapses. It is needless to add that good credit does not con- 
sist in the banker lending to himself. He cannot be a judge 
of his own affairs. The Comptroller of the Currency has 
digested the causes of failure of 418 banks, and finds that 
214 were caused by excessive loans to officers and directors, 
fraudulent management and embezzlement. 

Elements of Sound Credit 

By weight of authority, it is conceded that in granting 
credit three elements must be considered, namely: 

(a) Character (b) Capacity (c) Capital 

(a) Reliability (b) Capability (c) Resources 

(a) The man (b) The methods (c) The means 

(a) The moral risk (b) The business risk (c) The property risk 

Every application for credit does not possess all three, 
nor does it need to. But good credit, however, depends 
upon the degree in which these elements enter into the risk. 
The man with character, but no ability or capital, is doomed 
to failure. He has neither funds of his own nor the ability 
to safely use the funds of others. Good intentions never 
pay bills. He who has ability but no character is a bad 
risk — he may use his ability to defraud. Lack of ability and 
capital accounts for three-fifths of the business failures. The 
business that "turns over" frequently can run with less cap- 
ital than that which must be done on long credit. But even 
though his capital be small, the man with character and 
ability will be a safe risk. The ideal risk, however, is ade- 
quate capital, unimpeachable character and sound business 
methods. 

The Man — the Moral Risk 

Character means more than mere honesty. It means 
habits, companionships, past record, antecedents. Business 
character is business reputation, built up by long years of 
fair dealing. The man who claims to be honest must prove 
his claim by squaring himself with the world and keeping 
himself so. In the cooperative credit banks of Europe, 

29 



438 THE PRACTICAL WORK OF A BANK 

which have been eminently successful in the granting of 
credit, character is made the basis of all loans, and the losses 
have been remarkably few. While credit deals less with 
men than with things, the man must be analyzed as well as 
his possessions, for the statement, being a matter of honor 
(unless made by an independent audit) must be character- 
ized by good faith or it is worthless. 

His Methods — the Business Risk 

It is not enough that a man be good — he must be good 
for something. We test his ability by the manner in which 
he conducts his business, and by the character of that busi- 
ness. Is it, first of all, a legitimate business and sound; or 
illegitimate and full or risk? Is it stable, or subject to sud- 
den fluctuations — one that the whims of fashion may jeop- 
ardize overnight? Has the owner demonstrated his ability 
to manage a business; does he manage this one well? Has 
he built it up himself, or did he inherit it? Is he experi- 
enced or is he a novice? (Experience must precede the em- 
ployment of capital, else the latter may be lost while the 
former is being acquired.) Is it well stocked and well lo- 
cated? Are the profits ample, and are the expenses reason- 
able? Does he grant credit with care, or indiscriminately? 
Does he over-buy, over-trade, over-trust? Is he prompt in 
his collections and prompt in his payments? 

His Resources — the Property Risk 

Behind every good loan there must ultimately be prop- 
erty, tangible and convertible into money without great cost 
and undue delay. It is not enough that there be stock — it 
must be salable and seasonable, and of such nature as to 
help, not hinder, the business. The kind is as essential as 
the degree. It is not enough that there be book accounts — 
they must be collectible. Many a man has failed with a 
fortune on his books. A large business does not necessarily 
mean a safe business — its very largeness may carry it to de- 
struction. Is the capital borrowed or inherited, and if so 
are there any "strings" to it? Is the capital ample? Will 
the lack of money make over-borrowing necessary, and bur- 
den the business with too heavy interest charges? It takes 



ESSENTIALS IN GRANTING CREDIT 439 

money to do business, and while a large amount of ready 
cash need not, and should not, be idle in the bank, it should 
be quickly available by the maturity of obligations to meet 
current demands. 

The Statement— the Borrower's Estimate of Himself 

Modern credit is based upon statements prepared with 
the end in view of showing the true condition of the busi- 
ness at a stated time. Unless made by an independent audi- 
tor who has no interest, aside from accuracy, it resolves it- 
self into a man's estimate of himself. Its purpose is: To 
reduce losses; to minimize risks; to assist the worthy; to 
eliminate the unworthy. 

The statement consists of two parts: (a) Assets (from 
the French "Assez" meaning "enough"), and (b), the Lia- 
bilities. After making due allowance for the shrinkage in- 
evitable in all business, the assets must equal or exceed the 
liabilities or a state of insolvency exists. 

The assets readily divide themselves into (1) Liquid or 
quick assets, such as cash on hand and in bank, securities, 
collectible book accounts, bills receivable, marketable mer- 
chandise, and any other resources that may be turned into 
money or used as security. (2) Fixed, or non-liquid as- 
sets, such as real estate, furniture and fixtures, machinery, 
horses and trucks, etc. 

The question, therefore, to be decided in analyzing every 
statement is this: Is there enough? Not, will this man pay 
his obligations; but can he meet them as they fall due? Not, 
has he made money in the past ; but will he continue to make 
money in the future? Is this a "going" concern and likely 
to continue so? 

No two statements are alike and no general rule will 
apply to all; each application must be judged by itself. It 
is needless to say, however, that in granting credit, neither 
friendship, religion, politics, social or family ties, or senti- 
ment, should play any part — simply the cold, critical, analy- 
tical judgment that comes from experience, observation and 
study. 

The weakness of the statement lies in the fact that the 
borrower is tempted to unduly appreciate his assets and de- 
preciate his liabilities. And it is the credit man's particular 



440 THE PRACTICAL WORK OF A BANK 

business to see that the assets are not unduly magnified. 
Current liabilities cannot be met from fixed investments 
such as real estate and machinery, and the burden of carry- 
ing the business falls upon the liquid assets, leaving it to the 
fixed assets to add strength and stability to the structure — 
backbone, as it were. Some credit men are of the opinion 
that the fixed assets should be eliminated from consideration 
entirely, while others hold that they should be scaled at least 
fifty per cent, from the borrower's figures, and then re- 
garded as security only. But however this may be, if the 
fixed assets bear a large proportion to the liquid, they are 
an element of danger and tend to weakness; if small, they 
tend to strength. 

Just the proper proportion of capital to volume of busi- 
ness ; whether or not the business "turns over" promptly and 
profitably; whether accounts receivable are too large or too 
slow in maturing, can only be learned by experience. To 
correctly judge these elements in the granting of credit is 
to be a good credit man. And in passing upon credits, it 
must be realized that it is the business of the bank to loan 
money, and the credit that is refused because the applica- 
tion has been incorrectly analyzed has worked an injustice 
to the bank and perhaps an injury to the borrower. Profits 
arise solely from sound credits; losses from the unsound. 
The credit man must, therefore, play a double role: for the 
sake of his bank, and for the sake of the borrower, he must 
accept the good; and for the sake of his bank, irrespective 
of the borrower, he must reject the bad, and only training 
and experience can teach him to distinguish the one from 
the other. 17 

Standardized Forms of Credit Statement 

Credit was formerly based upon the knowledge possessed 
by the bank, either through its cashier, its loan committee 
or directors, of the borrower's affairs. His balance at the 
bank was known only in a general way and his trade con- 
nections and standing only by whether or not he had drafts 
made upon him by his creditors. 

Statements of condition are a development of the past 

i7"Essentials in Granting Credit," ante p. 372. 



ESSENTIALS IN GRANTING CREDIT 



440a 



Federal Reserve Bank of New York Statement Form 
INDIVIDUAL 



Statement of -. 

Business Address. 



MERCHANT, MANUFACTURER, ETC. 



To Bank of 

I make the following statemenbof all my assets and liabilities at the close of business on and give other 

material information for the purpose of obtaining advances on notes and bills bearing my signature or indorsement, and for obtaining credit 
generally upon present and future applications. 

(PLEASE ANSWER ALL QUESTIONS AND FILL IN ALL BLANKS) 



ASSETS 



Cash on Hand and in Bank, . 

Accounts Receivable 

Notes Receivable 

Merchandise 

Other Quick Assets (Itemize). 



Quick Assets 

Land and Buildings (See schedule on back).. . 

Machinery and Fixtures 

Other Assets (Itemize) 



LIABILITIES 



Accounts Payable 

Notes Payable to Banks 

Notes Payable to Others 

Other Current Liabilities (Itemize) . 



Current Liabilities 

Mortgages 

Other Liabilities (Itemize) 



Current and Deferred Liabilities 



Net Worth. 



Merchandise. On what basis \alued, cost or market? 

Finished $ Unfinished $ , 

Raw '$ If any goods on consignment, state 

amount and circumstances 



Do you take advantage of all trade discounts? 

Sales and Profits Last Fiscal Year . N et 53^3 $ 

Net profits $ 

Accounts and Notes Receivable. If any are past due or doubtful, 
state amount and circumstances 



If any are due from employees, relatives or similar sources, are 
included in assets, state amount and circumstances 



Contingent Liability. As indorser $ As guarantor 

$ No accounts have been sold or assigned ex- 
cept as follows: «- 

Accounts and Notes Payable. If any are past due state amount* 
and circumstances 



Bonds and Stocks. State general character and if readily salable at 

values stated -. 

Insurance. Fire, on Buildings? Merchandises 

Life ?. Who. is .beneficirry? 



Current Liabilities. During last fiscal year, current liabilities were, 

at a maximum (? ) on. ' 

and at a minimum ($ )on. . . > •. 

Mortgages and Other Liens. State due date of mortgages and on 
what assets a lien 



Is morteage a lion on any current assets? . . 

If any other liens on assets, state amount and circumstances. 



Age. My Age is Date started present business 

Audits. Are books audited by a certified public accountant?. 
Give date of last audit 



I hereby certify that the foregoing figures are taken from my books and that they and the statements contained on both sides of this sheet are 
true and give a correct showirig of my financiai condition. 



Signed this. 
(over) 



.day of lor Name. 



CREDIT STATEMENT INDIVIDUALS USED BY FEDERAL RESERVE BANK, NEW YORK 



440b 



THE PRACTICAL WORK OF A BANK 



Federal Reserve Bank of New York. Statement Form 
FIRM 



Statement of 

Business Address . 



To « ' • Bank of 

We make the following statement.of all the assets and liabilities of our firm at the close of business on . 

and give other material information for the purpose of obtaining advances on notes and bills bearing our signature or indorsement, and for 
obtaining credit generally on present and future applications.. 

(PLEASE ANSWER ALL QUESTIONS AND FILL IN ALL BLANKS) 



ASSETS 



Cash on Hand and in Banks. 

Accounts Receivable 

Notes Receivable . . 

Merchandise : 

Other Quick Assets (Itemize). 



Quick Assets . 



Land and Buildings .... 
Machinery and Fixtures . 
Other Assets (Itemize) . 



Merchandise. On what basis valued, cost or market 

Finished $. . ■ ... .Unfinished $ Raw $ 

If any goods arc on'consignment, state amount and circumstances . 



LIABILITIES 



Accounts Payable 

Notes Payable to Banks 

Notes Payable to Others 

Deposits 

Other Current Liabilities (Itemize) . 



Current Liabilities 

Mortgages 

Other Deferred Liabilities (Itemize) 



Current and Deferred Liabilities. 
Net Worth 



TOTAL 



Sales and Profits Last Fiscal Year. Net sales $ 

Net profits $ 

Accounts and Notes Receivable. If any past due or doubtful state 
amount and circumstances ; 



If any amounts are due from members of the firm, employees 
branches or similar sources, state amounts and circumstances 



Bonds and Stocks. State general character and if readily salable at 
value stated 



Fire, on Buildings $ Merchan 



dise $ > Life, in favor of firm $. 



Contingent Liability . As indorser $ 

As guarantor $ No accounts have been sold or 

assigned except as follows: 

Accounts and Notes Payable . If any are past due state amount 
and circumstances 

During last fiscal year current liabilities were at maximum 

($ ) on .and at a minimum 

($ ) on 

Mortgages and Other Liens. State due date of mortgages and on 

what assets a lien •._.-. 

Is mortgage a lien on any current assets ? 

If any other liens on assets, state amount and circumstances 



Reserves and Depreciation. State what provision is made. 



We hereby certify that the foregoing figures are taken from the books of our firm and that they and the statements contained on both sides of 
this sheet are true and give a correct showing of our financial condition. 



Firm Name. 
By 



Signed this day of 191 ... . 

(pVERI 

CREDIT STATEMENT FIRMS USED BY FEDERAL RESERVE RANK, NEW Y'ORK 



Member of Firm 



ESSENTIALS IN GRANTING CREDIT 



440c 



Federal Reserve Bank of New York Statement Form. 
CORPORATION. 



Statement of. 



Business Address . 



To Bank of 

We make the following statement of all the assets and liabilities of this company at the close of business on and 

give other material information for the purpose of obtaining advances on notes and bills bearing bur signature or indorsement, and for obtaining 
credit generally on present and future applications. 

(PLEASE ANSWER ALL QUESTIONS AND FILL IM ALL BLANKS.) 



ASSETS 




LIABILITIES 




































































































































































Quick Assets. 










Current Liabilities. . 




































Bonded Debt 




























































Current and Deferred Liabilities. 

Capital Stock Preferred , 






















































































.... 


TOTAL 










TOTAL 














Finished $ Unfinished $ Raw $ 

If any goods are on consignment, state amount and cir 




As guarantor $. No accounts have been sold 

or assigned except as follows: 


cumstances. . 








Accounts and Notes Payable. If any arc past due state amount 
and circu mstances 


Sales and Profits Last Fiscal Year. Net s 


lies 
id S 
ire 


t 








Accounts and Notes Receivable. If any 


Dast due or doubtful 


During last fiscal year current liabilities were at a ' maximum 






($ )on 








Mortgages and Bonds. State due dates of mortgages and on what 


If any amounts are due from directors, officers, employees, subsidiaries, 












Bonds and Stocks. State general character and whether readily 


Are mortgages or bonds a lien on any current ass 

If any.other liens on assets, state amount and circumstance 


ets?..... 








Reserves and Depreciation. State what provision is m. 


ide 



















We hereby certify that the foregoing figures are taken from the books of this company and that they and the statements contained on both sides 
of this sheet are true and give a correct showing of the financial condition of the company. 



.191. 



Name. . , 
By. 



Signed this day of 

(OVER) (State official title) 

CREDIT STATEMENT CORPORATION. USED BY FEDERAL RESERVE BANK, NEW YORK 



440d 



THE PRACTICAL WORK OF A BANK 



ICB-12 

Statement of 

Business ' Address. 



Federal Reserve Bank of New York Statement Form. 
INDIVIDUAL 

FARMER OR LIVE STOCK DEALER. 



To - Bank of 

I make the following statement of all my assets and liabilities as at the close of business on... 

Other material information for the purpose of obtaining advances on notes and bills bearing my signature or indorsement and for 
generally upon present and future applications. 

(PLEASE ANSWER ALL QUESTIONS AND FILL IN ALL BLANKS) 



and give 

obtaining credit 



ASSETS 


LIABILITIES 












Accounts owed by me 

Notes owed by me wit 

Notes owed by me wi 

other than rea 


















hout security 
















th security 




































.Notes or mortgages owed by me with 













real estate as a 






Farm products on hand , 














Notes owed by me with chattel 

mortgage as security 


























Net 




























Other property (Itemize) : 
























Total Liabilities 






































TOTAL 








TOTAL 








Location of Land Owned 


Acres 


Estimated 
Value 


Assessed at 


Mtgd. for 


Insured for 




































' 



















































Title . The legal and equitable title to all pieces of above described real estate is in my name solely, except as follows: 



Buildings. State general character 

-. Ever destroyed by fire?. 

Implements. State general character of those Iisted'as assets. 



Crowing Crops. Outlay to date is as follows: 
Cost of seed $ . 

" " fertilizer ....$. 

" " labor $. 

Other costs— (Itemize) $._ 

Total $. 

Insurance . Fire $ Life £ . 

Who is beneficiary? 



Contingent Liability . As indorser $ „ 

As guarantor $ As bondsman for others $ 

Accounts and Notes Payable . If any are past due state amounts and 



Maximum Debt. During last calendar year, my total indebtedness 

was at a maximum ($ ) on and 

at a minimum ($ )on 

Other Liens. If any other liens on assets, state am't and circumstances 



Age. My Age is Married or Single. 



I hereby certify that the figures and statements contained on both sides of this sheet are true and give a correct showing of my financial Condition. 

Signed this day of 191 ... . Name . .„ .,., 

(OVER) 



CREDIT STATEMENT FARMER OR LIVE STOCK DEALER USED BY FEDERAL RESERVE BANK, NEW YORK 



ESSENTIALS IN GRANTING CREDIT 441 

fifteen or twenty years and banks have learned that they are 
a necessary part of credit operations, and the firm that will 
not make them is not entitled to credit. Country banks 
even yet operate under the old rule, but the banks in all the 
larger places are now coming to see the importance of accu- 
rate and up-to-date credit information. 

The statement is the basis for all the other information, 
since it contains the basic element of property worth. The 
form of the statement in vogue to-day is an evolution that 
has come through the experiences of banks and credit organ- 
izations working together to devise a form complete and yet 
simple. Most, if not all, banks now have forms of their 
own, these being more or less standardized, so that uniform 
statements are now quite common. These statements are 
made or should be made at least yearly and a comparative 
statement form used, where the various items from year to 
year may be set opposite one another for comparison pur- 
poses. 

The Statement Must be Recent 



The statement is a digest of the firm's books and is in- 
tended to show the true condition of the business at the time 
of the audit, which should be by an independent party whose 
sole object is to present a true statement, conservative and 
safe, as a basis of borrowing. 

It must be recent, not over a year old, preferably with- 
in six months. Banks now have standard forms for this 
purpose, so that the information desired will be given by all 
borrowers alike and not only includes the balance sheet, but 
the statement of profit and loss account. 

It is more important that the bank shall know that the 
firm has made and is making money, than it is to ascertain 
that it has certain property and property rights. Its prof- 
its pay the proprietors for conducting the concern; out of 
the process of making the profits the concern must pay its 
loans, and out of the property the loans must be paid if the 
business as a going concern fails to show a profit. The 
banker who loans without a statement loans in the dark. 
The statement is the lighthouse guiding him which way to» 
steer. 



M2 THE PRACTICAL WORK OF A BANK 

False Statements 

There is always the danger that the statement may be 
false, and, therefore, of little use as a basis of credit. It 
may be wilfully false or unconsciously false. It depends 
largely upon the moral status of the borrower. In many 
cases it is the result of poor bookkeeping methods, the bor- 
rower being himself deceived. It has been said that it is 
not the customer with intent to deceive who brings the losses, 
but the customer who is himself deceived. He overestimates 
himself, is overconfident of success ; overreaches himself, and 
jeopardizes his own and the bank's funds. And here the 
value of an independent audit is coming to be recognized. 
Clearing-houses are taking the matter up, and lending 
weight to the movement to make independent audits com- 
pulsory as a prerequisite to loans. And if this audit is 
made by a recognized firm of standing, whose work is well 
known for its quality, there is no risk in the statement 
being false. 

Some firms have been sending in statements signed by 
clerks, bookkeepers and other irresponsible employees, and 
this should not be countenanced. The Federal Reserve 
Board will require sworn statements of condition. The ob- 
taining of goods under false pretences has always been a 
crime, and to obtain credit should all the more be so. Under 
the coaching of credit men and banking organizations sev- 
eral States have enacted stringent laws making the giving 
of a statement which is false for the purpose of obtaining 
credit a penal offense, as it should be. 

Statement Reciprocal in Value 

The National Association of Credit Men has realized 
the reciprocal value of the signed statement and steadily 
advocated its use as a benefit to both borrower and lender. 
In a treatise on the subject the association says: 

"Good credit in the markets of the world enables every 
merchant to add to his ability to do business. It gives him 
the use of enlarged capital, thus enabling him to carry a 
more complete stock, increase his sales, and magnify his 
profits. 

"Large assets are not always necessary to the creation 



ESSENTIALS IN GRANTING CREDIT 443 

of credit: what is most desirable is that credit be in relative 
proportion to the actual assets, and in harmony with condi- 
tions which create and maintain it. A merchant's capital 
is the sum of his net available resources, plus his credit. The 
giver of credit is a contributor of capital, and becomes, in a 
certain sense, a partner of the debtor, and, as such, has a 
perfect right to complete information of the debtor's condi- 
tion at all times. 

"Credit is given a merchant because of the confidence 
reposed in him. Requesting a statement when credit is 
asked is not a reflection on one's character, honesty, or busi- 
ness ability, but is done to secure information to enable 
business to be conducted intelligently. 

"When a statement is made it should be absolutely cor- 
rect. To make it so necessitates the taking of at least an 
annual inventory and the keeping of an accurate set of 
books. Statement giving, therefore, will tend to make a 
debtor a better buyer, because more familiar with his stock, 
more careful in giving credit, more conservative in incurring 
debt, and will result in a better knowledge of his business 
generally. 

"A merchant who desires to serve his own best interests 
should recognize that his most valuable possession, apart 
from his actual assets, is a sound, substantial and unques- 
tioned reputation as a credit risk, and that, under the pre- 
vailing conditions and demands of business, the most effec- 
tive, and eminently the best way to prove his basis for credit, 
is to be willing to submit a statement of his financial condi- 
tion." 

Analyzing a Statement of Condition 

The statement should show the assets and liabilities in 
the following order: 

Quick Assets — Cash on hand and in bank, bills receiv- 
able, accounts receivable, merchandise. 

Quick Liabilities — Notes payable, accounts payable, 
other quick liabilities. 

We then have the Fixed Assets — Land, buildings, ma- 
chinery and fixtures, good will, other investments. 

The Fixed Liabilities — Mortgages, bonds and other fixed 
liabilities. 



444 THE PRACTICAL WORK OF A BANK 

The intent of this classification is to permit the ratio 
of quick assets to quick liabilities to be quickly determined. 
The proportion that quick assets should bear to quick lia- 
bilities is a matter of opinion. It depends upon the trade. 
Some credit men make it a rule to have at least two to one — 
two and a half to one if possible. But in such lines as meats, 
one and a half to one would be considered ample; while in 
wholesale hardware, groceries and dry goods one and three- 
quarters to one is considered ample, or at least enough, by 
the rules already stated. 

Two to One 

Quick assets are bound to shrink during the process of 
collection, accounts receivable particularly, and there must 
be a margin of safety, and this margin depends upon the 
business and the methods of the men in charge and general 
conditions; but the ratio of two to one is considered suffi- 
cient under ordinary conditions; for if this be not enough 
things are in a bad way. 

While the ratio of safety naturally varies with different 
lines of business and each case must be considered on its 
merits, a careful banker will be inclined to avoid buying com- 
mercial paper of concerns whose statement does not show a 
ratio of quick assets to current liabilities of at least two to 
one. On this basis, any shrinkage of the working assets in 
liquidation less than fifty per cent, will still leave a margin 
over the debts. But in the case of a concern whose ratio of 
quick assets to liabilities is only 1.50 to 1.00, it is evident that 
any shrinkage of one-third in the quick assets will endanger 
the prompt payment of the creditors' claims. 

While fifty per cent, is a liberal margin of safety, it 
must be remembered that a statement is usually made when 
the liabilities are smallest, and if a concern cannot show 
quick assets of twice the current debts at that time, there 
will probably in the height of its season be only a very small 
margin of quick assets above the debts, so that a shrinkage 
amounting to only a small percentage of the assets will wipe 
out the excess of quick assets over the current liabilities, and 
will thus endanger the prompt payment of the maker's note. 

In this analysis both the slow assets, such as real estate, 
fixtures, obscure investments, etc., and the slow liabilities, 
such as mortgages, bonds, special capital, etc., may be ig- 



ESSENTIALS IN GRANTING CREDIT 445 

nored; because it may be safely assumed that in the brief 
period that commercial paper has to run there will be no ma- 
terial change in such fixed assets or slow liabilities. 

The banker is not confined to deductions from the bor- 
rower's figures in determining the degree of convertibility of 
the latter's assets. An actual and consistent test of con- 
vertibility is furnished him in the manner in which the con- 
cern meets its current trade bills. The assets of a merchant 
who is able to discount all of his accounts payable are evi- 
dently more liquid than those of a merchant who requires 
the full terms, in spite of an attractive discount offered for 
earlier payment. And if a merchant, in addition to the reg- 
ular terms of purchase, is tardy in meeting his merchandise 
debts, it is evident that his assets are not turned into cash as 
readily as they should be, either because the merchant is not 
moving his goods, because he is selling to a poor class of 
trade and his collections are slow, because he is carrying too 
large a stock of merchandise, or because he is trying to do 
too large a business for his capital. 

Whatever the reason, when a banker learns that a bor- 
rower is slow-paying, it behooves him to use great caution in 
loaning; and if the condition is chronic, the risk outweighs 
the profit on the transaction, and the credit should be dis- 
continued. Tardy payments are not only a sure sign of im- 
mobility in the assets, but they place the merchant at the 
mercy of his creditors, who may at any time petition him into 
bankruptcy, and the percentage of the shrinkage of assets 
in the hands of receivers is too well known for comment. 

In analyzing the figures, it is very important to note the 
ratio of liabilities to capital; the heavier the debts (other 
things being equal), the greater the risk, because a less 
shrinkage or loss of assets is necessary to make them inade- 
quate to liquidate the debts. For instance, if the liabilities 
are half the assets, a shrinkage of fifty per cent, would be 
required to cause a loss to the creditors ; but if the debts are 
two-thirds of the assets, a shrinkage of only thirty-three per 
cent, would be required. 19 

Cash 

While a large amount of cash is not desirable, or in some 
cases necessary, there should be a fair bank balance as a mat- 

i»Oscar Newfang in The Bankers Magazine. 



446 THE PRACTICAL WORK OF A BANK 

ter of courtesy to the bank, as well as a quick source of funds 
for the daily need of the business. A proper working bal- 
ance is always desirable. In the panic of 1907 some firms 
did not have two weeks' payroll on hand and were hard 
put for ready money. Various concerns look at this prop- 
osition differently. For a concern that is borrowing 
from one bank only, it is perhaps not so important that they 
carry large cash balances, provided the bank does not insist 
upon it. If, however, they are seeking credit from banks all 
over the country by placing their paper through brokers, 
they should be able to show that they will be able to take up 
part of their obligations if presented, without great diffi- 
culty. This means that they ought to have an ample cash 
balance. 

The cash should not be too large, for it represents idle 
money; neither should it be too small, for it may inconven- 
ience the firm. Just the proper proportion depends upon the 
nature of the business. 

Cash on hand and in banks is usually worth its listed 
amount. If any "I. O. U.'s" are in the cash, of course, they 
should be eliminated, as well as all cash items that are not 
cash or equivalent to cash. Because cash has been paid for a 
piece of paper it does not follow that cash will be received 
for it. 

Bills Receivable. 

Many progressive concerns prefer to carry open accounts 
rather than have on hand their customers' notes. As a con- 
sequence this item has more or less given way to accounts re- 
ceivable. Where such bills receivable do figure prominently 
we must be careful to learn their exact nature. They may 
be clean merchandise notes, easily collected, or they may be 
old notes which have been renewed time and again, and en- 
larged by added interest. In but few lines are notes now 
given, and they do not, as a rule, appear in large volume in 
the average statement. 

Do these include any notes of the firm, officers, em- 
ployees, or others interested, whose collection would be un- 
pleasant, if not impossible? Do they represent money 
loaned? They should be for goods sold and delivered, or 
for open accounts settled by note, and if for the latter pur- 
pose, the account should not be of long standing. An over- 
due account settled by a note is not a healthy asset. 



ESSENTIALS IN GRANTING CREDIT 447 

Are any of these notes pledged, or rediscounted and in- 
cluded in bills receivable? Are any past due? Have any 
been renewed or extended? How much of this item repre- 
sents amounts due from branch houses, affiliated concerns, 
etc., "a wheel within a wheel"? 

It is a difficult yet an important part of the statement 
analysis to determine if the ratio between the various assets 
is normal for the business. To do this accurately requires 
a general knowledge of the terms and customs of the busi- 
ness. For instance, in raw silk the terms are six months' 
note, and we would expect a high ratio of bills receivable, 
and a small accounts receivable. In sugar refining the terms 
are seven days net, and a similar ratio would indicate that 
something was wrong. There should be few, if any, receiv- 
ables in sugar. 

Lumber, raw fur and other concerns sell on notes, and 
we may expect to find these in considerable quantity in their 
statements. Agricultural implements are also sold on notes, 
running over a series of months, and these we would expect 
to find in large volume in such a concern. Automobiles, 
scales, cash registers, etc., are likewise sold on notes, due 
serially, and while these are in the main good, they mature 
slowly; and in case of failure of the concern would be slow 
in collection; for as soon as a house fails it becomes difficult 
to collect outstanding accounts. In a recent reorganization 
of a large department store in New York, it was found that 
the regular customers would pay their bills contracted after 
the store reopened in preference to making payment of the 
old balances. 

The firm that sells on note should not have a high pro- 
portion of accounts receivable, and a business where the 
credit is on book account should not have many notes in its 
assets. The two forms of credit should not appear together. 
Notes are often taken to settle overdue accounts, and indi- 
cate that the maker is not in funds. If he cannot take his 
discounts and meet the terms of the sale, he is a doubtful 
risk, although not necessarily a bad one. 

Accounts Receivable 

Accounts receivable should be the undisputed obligations 
of customers of the concern. They should stand in the place 



448 THE PRACTICAL WORK OF A BANK 

of merchandise sales, which they truly represent, and should 
be absolutely free from pledge. They are the best quick as- 
set, next to cash and bills receivable, and should be of recent 
date, properly scaled. 

Accounts receivable are the measure of the merchant's 
ability to sell as applied to merchandise. Merchandise by 
itself is an asset without life. It does not sell itself. But 
book accounts, well selected, will automatically turn into 
money by the process of time, and at little expense. Even 
the death of the proprietor will not affect this process. The 
debt must be paid. 

Are all such accounts due from customers? Are any 
fictitious? Have the doubtful accounts been eliminated? 
How much has been allowed for depreciation in the collec- 
tion of these? Are any of these pledged to factors or com- 
mercial bankers or banks. 

How much of this amount is due from branches and af- 
filiated concerns? What are the terms of sale? Is there a 
good collection department? What proportion of bad debts 
is charged off yearly? 

Are the accounts and bills receivable for a short time and 
being constantly turned over? When a corporation's note, 
usually at four or six months' maturity, is bought, you ought 
to know that the corporation is likely to receive returns from 
sales of their merchandise in an equally short time, so that 
they are not depending on re-borrowing to pay off maturing 
obligations. 

Another important factor is the relation of the accounts 
receivable to the merchandise. Conservative credit men are 
expressing a preference in the ordinary wholesale and job- 
bing lines for a long line of receivables rather than a large 
stock of merchandise. An eminent New York credit man 
once said that if you have any suspicions regarding a state- 
ment, ask the maker to submit a detailed list of his accounts 
receivable with the dates of the invoices. If he is attempting 
to deceive, such a request will invariably bring him into the 
open. 

The yearly sales are also valuable as a guide to the condi- 
tion of the accounts receivable. Having the total yearly 
sales, they may be divided into monthly averages, and the 
average sales determined. If the terms of sale are thirty 
days, the firm should not have over forty-five days' sales on 



ESSENTIALS IN GRANTING CREDIT 449 

its books, and if so, it shows that credit is too loosely extend- 
ed and collections too slow. It might, of course, be due to 
heavy sales just preceding the time of statement, or a pre- 
vailing depression making collections slow, but the reason 
should be ascertained. Every overdue account represents 
idle capital of the firm which is doing nothing. The bor- 
rower might be asked to classify his accounts into thirty and 
sixty-day and overdue accounts, to show the condition of his 
collections. 

When the amount of the annual sales is not obtainable, a 
fairly accurate idea of the activity of the business may be 
obtained by noting the amount of the accounts and bills re- 
ceivable, and considering this in conjunction with the cus- 
tomary terms of the business. For instance, in a line extend- 
ing terms of two per cent., ten days, sixty days net, good 
customers' receivables of $200,000 would be a reasonable as- 
surance that the annual sales were well over $1,000,000. This 
applies only to lines in which business is done upon credit ; a 
retail cash business could not be judged in the same way. 



Merchandise 

Merchandise is the most difficult of all the assets to cor- 
rectly analyze or appraise. In this item there may be gross 
overstatements and gross frauds. Goods are worth, not their 
cost, but what they will bring. But to appraise merchan- 
lise at its selling price is to gamble on the sale, and anticipate 
profits. No accountant will accept inventory at selling 
prices. Cost is the nearest correct basis, inasmuch as cost at 
least must be realized or bankruptcy must quickly follow. 

If the merchandise is seasonable and salable, the credit 
man could tell, by knowing the turn-over for the year, about 
how long it would take to turn it into money. In a stock of 
meats, a few weeks would turn the stock into cash. Gro- 
ceries a litttle longer; dry goods a little longer; furniture a 
little longer; drugs a little longer, and so on as the goods 
become less and less of the necessity class and get into the 
luxury class. Some old stocks could hardly be given away. 

It is said that a well-managed department store will not 
order a large number of a new book ; but if it anticipates the 
sale of a hundred copies, it buys ten; orders ten more when 



450 THE PRACTICAL WORK OF A BANK 

eight are sold, and so on until the demand slackens, and thus 
it finds no dead stock on its shelves. 

Where the merchandise is both finished and unfinished, 
it frequently happens that either or both are quickly salable, 
and, therefore, quick as an asset; while in the manufacture 
of heavy articles such as machinery, the raw material is mere- 
ly iron and steel, while the manufactured article may be a 
printing press. 

Too many of the old-time merchants, and some of the 
least experienced of the modern school, are inclined to value 
merchandise in their financial statement at cost, and as a 
result they go on year after year deceiving themselves as to 
their real financial standing. The value of merchandise to 
the merchant for the balance sheet, or other purposes, is 
determined by reducing the real selling value by a percen- 
tage that will cover expenses and show a profit when it is 
sold. 

Inventory 

Messrs. Ernst and Ernst, official auditors and system- 
atizes for the National Retail Dry Goods Association, give 
this as the rule for inventory: "The real value of any stock 
of goods should be based upon selling price less original per 
cent, of mark up, representing the profit. From our wide 
experience in dry goods and department stores throughout 
the country, we have found that each store has a uniform 
percentage of profit which it aims to obtain in selling goods, 
and when the selling price is reduced we believe the inven- 
tory valuation should be correspondingly reduced. As an 
example: When an article costs $1.00 and is sold for $1.50, 
the percentage of mark-up is thirty-three and one-third per 
cent. If this article is reduced to sell for $1.00, we believe 
the inventory value should be reduced one-third, or to sixty- 
six and two-thirds cents, leaving a mark-up of thirty-three 
and one third per cent, on the selling price." 22 

Pertinent questions in regard to merchandise are : Is it 
finished or unfinished ? How and by whom and when was it 
valued? Is any merchandise hypothecated, or under trust 
receipt? Is the stock fresh and seasonable? How much is 
held under consignment? 

2 2New York Times, April 6, 1914. 



ESSENTIALS IN GRANTING CREDIT 451 

A careful credit man would not make large advances to 
a merchant whose assets consisted mainly of merchandise on 
hand. It must not be on his shelves, but on his books in 
part, at least, and turning over frequently. 

The liquidity of a stock of goods may be seen by a simple 
example of a small country grocery, which has a stock of not 
over $500 and yet its total sales are over $10,000 a year, in- 
dicating that the stock comes in and goes out twice each 
month. This, of course, is unusual; but all business should 
turn over periodically, so that dead stock does not accu- 
mulate. 

Many bankers seem to place greater stress upon an out- 
side audit of the borrower's books than upon his moral char- 
acter, in estimating the reliance to be placed upon his fig- 
ures. While an audit is certainly of some advantage, it must 
be remembered that the auditor's limited time never permits 
him to verify inventories by actual count, nor does he usually 
verify the accounts and bills receivable by actual correspond- 
ence with the debtors. That there is no other indebtedness 
than the amount shown by the books, he has, of course, no 
means of knowing. 20 

Do the accounts receivable bear the proper ratio to the 
merchandise on hand? In other words, are they converting 
their merchandise into accounts receivable and not allowing 
it to accumulate on their floors? We can determine about 
this if we know their total volume of sales and terms of their 
sales. For instance, if they sell on ninety-day terms and 
get their money on an average of four months, and the 
total sales are $900,000, we would conclude that their amount 
of merchandise at any one time should be about $300,000, 
or one-third of their total sales. In this case we assume they 
turn over their money three times a year. 

Trust Receipts 

Many kinds of merchandise are assets which can be 
pledged with warehouses against advances. This furnishes 
another example of the care that must be exercised by a 
banker who makes loans on the security of the general assets 

2<>Mr. Newfang ante p. 445. 



452 THE PRACTICAL WORK OF A BANK 

of a business to prevent a preference in favor of other cred- 
itors. The value of the merchandise stock will depend large- 
ly upon whether the goods are durable or perishable, staples 
or specialties, luxuries or necessities. If they have been im- 
ported under a commercial letter of credit and the foreign 
exchange dealer has not been paid, under the form of trust 
receipt commonly used, he has a claim against the merchan- 
dise in any form into which it has been converted, provided 
it can be traced — that is, he can seize the goods, he can seize 
the accounts arising from their sale, or attach the money rep- 
resenting the proceeds of collections if it is earmarked in any 
way to permit identification. 21 



Capital Assets 

The opinion as to the value of capital assets is wide. 
Whether land, buildings and machinery add worth to the 
concern is open to discussion, and there is a difference of 
opinion among credit men. If the fixed assets were to be 
turned into money it would stop the whole business to real- 
ize upon them, so that selling the fixed assets is out of the 
question; while in the case of liquid assets, it is presumed 
that they will automatically turn into money, and keep the 
business going. 

The banker likes liquidity of assets. He cannot collect a 
loan out of brick and mortar half so quickly as out of a 
stock of goods. And land and buildings never can be sold 
as quickly as merchandise. 

A firm in Brooklyn at one time based its worth mainly 
upon a large tract of well located dock property. It was its 
principal asset. For seven years it has been trying to sell 
that property and it remains to-day on the market as 
unsalable. It carried the firm down. If the property is 
mortgaged, of course only the equity can be considered, and 
so many properties have a limited utility that this must be 
considered even in allowing for the equity. A specially 
erected building may have value to the concern for whom 
it was erected, and yet to any other would lose much of its 
value. If a concern has its capital too largely in fixed as- 
sets, land, buildings and machinery its bankers must carry 

2iMr. Snyder ante. 



ESSENTIALS IN GRANTING CREDIT 453 

its liquid affairs. Working capital must come from some- 
where and it devolves upon the banks to furnish it. 

Current liabilities should not be incurred for fixed pur- 
poses. A building should be erected from the mortgage 
loan at the savings bank and not from commercial paper 
sold in the market; and the mortgage loan should not carry 
merchandise from the manufacturer to the consumer. Liquid 
loans for liquid purposes, and fixed loans for fixed purposes 
should be the rule. 

Pertinent questions relative to the real estate are: Land 
— what is its value? Buildings — how old? What rental 
do you pay? What is the fair market value? By whom 
was this value placed, and when? What provision is made 
for depreciation of the buildings, the plant and machinery? 
What insurance is carried? What is the assessment? Are 
the taxes and assessments paid? 

Machinery and Fixtures 

Machinery and fixtures are so very uncertain as an as- 
set that they can hardly be considered an asset at all. Ma- 
chinery wears out, becomes obsolete, and is soon scrapped by 
time and advancing improvements, if not by the owner. It 
is a slow if not a doubtful asset wiierever it appears. 

Is the physical property in good shape? While a bank- 
er does not look at the items of plant and machinery as 
closely as those in the quick asset column, yet it is very im- 
portant to know that the manufacturer, for instance, has a 
good plant, well adapted to his uses, well protected from 
fire loss and conveniently situated to transportation. This 
naturally brings up the next question. 

Is depreciation on the permanent investment taken care 
of? The banker should insist that the borrower depreciate the 
book value of his plant and equipment each year correspond- 
ing to their actual loss in value through use. The conserva- 
tive manufacture will always do this as he does not want to 
deceive himself, let alone his creditors. 

"Other investments" will include stocks and bonds of 
other corporations, stocks held in affiliated concerns, and 
other investments which must be investigated to know their 
marketable value before they may be allowed in the state- 



454 THE PRACTICAL WORK OF A BANK 

ment at all. Some such holdings would be prime security 
and prime assets ; others would be of no value at all. 

Liabilities 

The principal quick liabilities are notes payable and ac- 
counts payable. Notes payable are of four classes: Notes 
given for merchandise, and not settled by book account * 
notes payable to the dealer's bank; notes payable through 
brokers, and notes given for other things, such as fixtures, 
machinery, etc., not classified as merchandise, together with 
notes given for advances of funds for capital purposes. 

The merchant should not issue notes for merchandise and 
borrow in the open market at the same time; his open mar- 
ket borrowing is for the purpose of taking his discounts and 
he ought not to pay by note. If the custom of the trade 
is to settle by note, as in lumber, payables are legitimate, but 
not otherwise. 

Bills payable should be either for merchandise or for 
money borrowed. If for the latter they would usually be 
payable to banks or note brokers. Many houses are judged 
by the brokers offering their paper on the market. A re- 
liable house can ill afford other than a first-class broker to 
perform this very important task. Here we have an insight 
into a concern's ability to finance. If they are putting much 
paper on the market they should be reserving their credit at 
the bank, and vice versa. If we find, however, that in pro- 
portion to their business they are utilizing both means to 
their limit and also giving notes for merchandise, we may 
judge that they are "sailing close to the wind," a signal for 
us to reef the sails of our credit line. 

Unless it is a custom of the trade to settle bills in this 
way, it indicates overtrading and undercapitalization, both 
conditions which must be promptly reckoned with if a crash 
is to be averted. In some statements the "bills payable" are 
not separated, but the presence of odd cents is sufficient to 
put one on inquiry, unless, under the concern's bookkeeping 
system, unearned interest is deducted from the gross "notes 
payable" and only the net recorded. If the concern is selling 
its paper in the open market, the notes payable to banks 
should be comparatively small, as the conservative borrower 
keeps his bank lines open when his paper is on the street. 



ESSENTIALS IN GRANTING CREDIT 455 

Probably no other item in the depositor's statement can be 
more readily checked than this one and no other is more im- 
portant. A recent case is recalled where an investi- 
gation which consumed half an hour and the writing of one 
letter, revealed a discrepancy of nearly $20,000 and finally 
resulted in a receivership and reorganization. 23 

Queries regarding notes payable: How much is carried 
with your own bank? How much on the market? What 
banks do you deal with? When do you borrow at home? 
When in the market? How much through each? Do you 
borrow continuouslv in the market? Do you discount all 
bills? 

Accounts Payable 

If we find that bills payable is a large item, then ac- 
counts payable should be inversely small. The proceeds 
from the former would ordinarily be applied to the payment 
of accounts, making accounts payable a small item. As 
before stated, the tendency the last few years is toward car- 
rying open accounts rather than accepting and carrying 
notes for merchandise. 

Are any of these overdue? Are they all for merchan- 
dise? Is any merchandise in stock and the bill not included 
in the liabilities? 

Does the borrower take care of his trade obligations 
promptly and satisfactorily? Generally speaking, a concern 
that is large enough and in good credit enough to borrow 
through a commercial paper broker should be discounting 
all its bills in the trade, and should not be asking extension 
in any form nor show a large amount of accounts payable. 
There should be no excuse for them to issue paper to trade 
creditors, and the presence of bills payable to trade creditors 
is a sign of weakness that would be recognized at once. You 
can obtain very valuable comment and criticism from people 
in the trade who have either sold the borrower or who, per- 
haps, are in direct competition with him. 

The mortgage debt and bonded debt are termed "capital 
liabilities' and together with current liabilities constitute the 
total liabilities of the firm or corporation. When is the 
mortgage due? What is the rate of interest? Is it paid 
regularly? 

23F. B. Snyder ante. 



456 THE PRACTICAL WORK OF A BANK 

Ratio of Plant to Capital 

The proper ratio of working capital to plant is another 
point to be carefully noted in the analysis of a borrower's 
statement. In general it may be said, the less plant invest- 
ment, the better; because this portion of the capital is not 
being turned over at a profit, but, on the contrary, is con- 
tinually depreciating, and is a constant drain upon the prof- 
its earned by the circulating capital. While this is the gen- 
eral rule, the normal ratio of plant to working capital varies 
greatly in the different lines of business. In a jobbing or 
retail business this ratio is normally very small, because in 
the former only a small amount of fixtures is required, while 
in the latter perhaps a larger amount of fixtures, but no ma- 
chinery, is needed. In a heavy manufacturing business the 
plant may be considered fairly normal, if it does not exceed 
the amount of a year's sales; but if it does largely exceed 
these figures, it is usually found to contain more or less good 
will or water in its valuation. 24 

Having a statement of the actual assets and liabilities, 
it becomes important to know the contingent liabilities, for 
these may be so great as to work disaster if they are en- 
forced, as, for instance, the contingent liability on an in- 
dorsed note. 

Contingent liabilities is one of the most important items 
contained in the statement — if indeed we find it therein at 
all. Not being our customer's own debts he may be back- 
ward in disclosing the extent to which he has endorsed paper 
for other persons or firms. Many houses have been ruined 
by the collapse of firms for whom they had endorsed much 
paper. Again, a firm's endorsement may be put upon notes 
of individual members of the firm; a very dangerous prac- 
tice and one which the credit man must make note of. All 
customer's notes discounted at the bank figure under this 
head. While the proceeds of such notes are carried as cash, 
still they bear our borrower's endorsement, and he would be 
held liable for their payment. 

Any firm having subsidiaries should be carefully investi- 
gated to ascertain the relationship that exists. In the Claflin 
failure in 1914, this was the great weakness, the unknown 

24Qscar Newfang ante. 



ESSENTIALS IN GRANTING CREDIT 4-57 

liability. It had received notes from its subsidiary firms, 
and sold them with its indorsement, and this liability was not 
accurately known. And by reason of its affiliations it car- 
ried down prosperous concerns with it, and the interlocking 
interests were so complex that the true condition of the 
parent concern, as well as the affiliated ones, could be de- 
termined only with difficulty. 

Net Worth 

The gradual growth of the net worth is an item which in- 
terests the banker. Unless a business is conducted at a 
profit, it has but little excuse for existence and less excuse 
as a credit seeker. If the business is successful, but the 
earnings are constantly drawn out, the management is neg- 
lecting to create a buffer against hard times. It may also 
be an indication of high living at the expense of the business, 
which, in the end, means at the expense of the creditors. 

Depreciation 

A constant subject of debate among accountants is the 
proper method of depreciating equipment. Modern practice 
seems to favor carrying machinery at its actual or cost value, 
with new equipment added and old machinery deducted, and 
repairs, of course, charged to expense, while the actual de- 
preciation is accumulated on the opposite side of the ledger, 
as a liability. This method is conceded to be better at least 
for insurance purposes. Ileal estate should be scaled each 
year to bring it down to at least its market value. 

Bank Connections 

Has the borrower adequate bank facilities? This is a 
very important point, because if a borrower, especially in a 
country town, has his borrowing shut off through brokers 
by reason of financial depression, he has to fall back on his 
own banks. It is important to see, therefore, that the bor- 
rower has enough banks and enough loaning power to take 
care of his total requirements. The cleanest proposition is 
for a concern to have one or more banks with lines of credit 



458 THE PRACTICAL WORK OF A BANK 

definitely established for its maximum requirements and then 
to put out its paper through the brokers for the advantage 
of lower money rates, leaving the bank lines open. 

Liabilities to Capital 

The relation of the total liability to the capital deserves 
attention. As a general rule a man should have at the risk 
of the business more of his own money than that of his cred- 
itors. Again we meet with the various exceptions to any 
rule in credit work. The exceptions in this case are prac- 
tically the same as those in the "two for one" quick assets 
to liabilities rule. The working capital should also be 
compared with the annual sales, bearing in mind the con- 
ditions of the particular business to determine whether or 
not the concern is overtrading. In one case a dry goods 
company turned its capital 3.36 times, which is rather low 
for this line. 

Accrued Assets and Liabilities 

In the statement of assets and liabilities, it is but fair 
that any accrued but uncollected assets such as interest, 
rent, etc., be considered as an asset, and on the other hand, 
the business must be charged with accruing liabilities, such 
as taxes, dividends, and other accruing charges at the time 
the audit is made. 

Good Will 

The question of good will is an important one, and one 
that has given accountants and bankers much thought. In 
some companies it is a very important element, and is car- 
ried as a nominal asset; while in others it is a very large 
asset and of questionable value in the amount carried. 

Good will is nothing more or less than the supposition 
that trade will follow an established course; that patrons 
will continue to trade at the old stand. The good will of 
any of the widely-advertised products is difficult to deter- 
mine. Baker's Cocoa is the result of years of building up a 
trade; Ivory Soap is as well known as Uneeda Biscuit; and 
Sapolio a household article. 



ESSENTIALS IN GRANTING CREDIT 459 

Whether any product could crowd these out of their 
fields is doubtful, so long as the quality and service is main- 
tained. And to capitalize this "tendency of trade to follow 
the established lines" is entirely proper. But as an asset for 
bank loans, it depends altogether upon what the good will is, 
how long established and the field. 

Integrity of Organization 

The successful continuance of a business depends upon 
the integrity and strength of its organization, as well as 
upon the integrity of character in its management. The 
principal points to be considered in judging the strength of 
a business organization are its safety and permanence, har- 
mony among the managers, and experience in the various 
branches of the business, manufacturing, selling and finan- 
cing. A large business which is dependent for its continu- 
ance upon a single individual is a poorer risk than one which 
rests in the hands of several men. The sudden death or dis- 
ability of the head of a one-man enterprise may seriously em- 
barrass the business and imperil its creditors — a danger 
which is not likely to occur where the management rests with 
several capable men, all of whom will rarely be disabled at 
the same time. 

Harmony among the officers, directors and managers of 
large enterprise is essential to its success. When a banker's 
investigations of a name reveal internal dissensions and dis- 
cord, it is best not to extend credit. 25 

The Passing or a Loan 

Having an application for a loan, or a piece of commer- 
cial paper under advisement, it becomes the duty of the 
credit department to assemble the information for the guid- 
ance of those who will pass upon the application. 

Let us suppose that the paper of Adams, Jones & Com- 
pany is offered. We know nothing about them, except that 
it is offered by a reliable broker. It is taken under ten-days' 
option, in the sum of $25,000, and the following data is 

25Qscar Newfang in The Bankers Magazine. 



460 THE PRACTICAL WORK OF A BANK 

assembled by the credit department as bearing upon that 
firm: 

February 1, 1915. 

ADAMS, JONES & CO., WHOLESALE GROCERS, SMITHVILLE, N. Y„ 

Purchase of $25,000 under option, January 28, 1915. 
Three notes of $5,000. Dated January 20, 1915. 
One note of $10,000. Due April 20, 1915. 

SUMMARY OF STATEMENT, JANUARY 1, 1915. 

Cash $20,000 

Accounts receivable 100,000 

Merchandise 450,000 

Total quick assets — $570,000 

Accounts payable $145,000 

Bills payable 227,500 

— 372.500 

Surplus quick assets $197,500 

Real estate $100,000 

Sundries 40,000 

Net worth $337,500 

Sales $600,000 

Ratio quick assets to liabilities 1.53 

Comment by Ckedit Man 

"The ratio of quick assets to liabilities is satisfactory for 
a grocery house. The accounts receivable are not large for 
a firm of this size, being one-sixth the annual sales, and are, 
therefore, equal to two months' sales, but should be reduced 
by better collection methods. The accounts payable are a 
trifle too large, and the firm has borrowed up to about two- 
thirds its net worth. The real estate is an old building, well 
located, but should be scaled at least ten per cent, from these 
figures, the property having been carried at these figures 
for ten years, and property in that neighborhood has not in- 
creased in value. I recommend that only $5,000 be taken." 

Then follows digests of letters received from banks that 
have purchased the paper, and from firms having had deal- 
ings with them, somewhat as f ollows : 

BANK A. 

1-31-15. 
Says this is an old and well established house, having account with it for 
twenty years; never overdrawn, and never had a protest. Offer them a liberal 
line which is never fully taken. Borrow occasionally and pay promptly. Take 
out most of the profits.; men live modestly but well. Are not given to extrava- 
gance, and are liberal in charities and public matters. Borrow in the fall but 
clean up in the early spring. We buy direct of them and in the open market 
and regard them as highly desirable. 



ESSENTIALS IN GRANTING CREDIT 461 

BANK B. 

1-29-15. 
Have bought their paper steadily when offered for the past five years. Buy 
all we can get. Have none now. Have confidence in management, and regard 
them well. 

FROM THE TRADE: 

FIRM A. 

We sell these people all their coffee, teas and spices. Discount all their 
ibills; never had any trouble; buy close and pay promptly. 

The agency reports would be somewhat as follows : 

COMMERCIAL AGENCY. 

1-30-15. 
This firm started in business in 1885 with capital of $25,000. Has steadily 
made money. Profits allowed to accumulate in early years, but withdrawn of 
late. Business now profitable, ably managed, but subject to competition of a 
new and aggressive firm in the same territory. Partners said to be worth quarter 
of a million jointly, stand high in the town and own considerable real estate. 
Adams and Jones the only members of the firm. 

The officer looks over the report and if he coincides with 
the views of the credit man, returns $20,000 of the paper 
with a request for another offering. 

Where the application is from a depositor, the informa- 
tion will be largely from its own banking experience, as 
evidenced by the average balance, average indebtedness and 
digest of statement as above. 

Many institutions do not require their credit departments 
to make the report as above outlined. The offering slip is 
all that goes before the discount committee. Under a head- 
ing "Remarks" the department writes the result of its in- 
vestigation and recommendation. However, such a report is 
a good thing. It condenses the information, makes it readily 
available for future reference, and is evidence that the loan 
has been given thorough attention, and does not have to be 
read by the committee if it is satisfied to be governed by the 
conclusion of the department as contained on the offering 
slip. 

When the loan has been passed on by the discount com- 
mittee, whether authorized or not, these papers are returned 
to the credit department, and become part of its records. If 
another loan from that borrower is ever under consideration 
the information is at hand for reference. 



462 THE PRACTICAL WORK OF A BANK 

What the Credit Man Wants to Know 

Here are some questions that suggest the line of informa- 
tion which the credit man likes to know that the bare state- 
ment does not cover: Is the business legitimate, and is it 
firmly established? If a manufacturing establishment, is it 
one catering to a steady demand, or to some whim? (It is 
easy to figure out that if there are ninety million people in 
the United States, and if one out of every ten buys an arti- 
cle for ten cents that costs nine, what the profit will be. It 
is another thing to persuade that one to buy.) But if they 
all eat, it is fair to assume that if you make something they 
must eat, some portion of the ninety million will buy that 
product. Beefsteak never goes out of fashion. Is the busi- 
ness a monopoly, or is it subject to disastrous competition? 
Is the business well located and well served by transporta- 
tion facilities? Can it operate cheaply, and does it? Who 
are the owners and how came they by the business? Are 
they trained men in both business and finance? Can they 
sell as well as make? Are they well balanced both in the 
selling and in the technique? Do they keep proper books of 
account so that their financial position may be correctly 
ascertained? Have they a fair idea as to the cost of opera- 
tion? Do they work under patents and are the patents good 
and still in force ? Is there litigation pending that if adverse 
will prove costly? Do they carry reserves for bad debts and 
depreciation? 

Commercial Paper 

Commercial paper as commonly known may be defined as 
consisting of those instruments — notes of hand — which are 
issued by firms and corporations and sold through the me- 
dium of commercial paper brokers to banks. 

Commercial paper is issued in large denominations, 
usually $2,500, $5,000 and $10,000, runs from three to six 
months, the purpose being: (a) To borrow at cheaper rates 
than would be obtainable at home; (b) to have wider bor- 
rowing facilities; (c) to keep in reserve borrowing accom- 
modations at the home banks; (d) to obtain cash with which 
to take advantage of the cash discounts offered in the trades. 

Looking at it from the banker's viewpoint, commercial 
paper is bought for the purpose of (a) investment, when 



ESSENTIALS IN GRANTING CREDIT 46S 

the home demand is slack; (b) to have a wider field for lend- 
ing, frequently at better rates than home conditions war- 
rant; (c) to have paper maturing constantly — a stream of 
maturities which he is under no obligation to renew. 

The difference between commercial paper and ordinary 
loans and discounts is the fact that the bank has no interest 
in the commercial paper, aside from its goodness, and is 
under no obligations to renew, either as a matter of protec- 
tion to itself or as a favor to the borrower. 

It is a good policy for a concern to borrow in the open 
market and reserve its home banks for emergencies. It can 
often obtain better rates in the broad market, and has the 
home bank to fall back upon when needed. The amounts 
due to home banks can be ascertained by communicating 
with the banks, and the discount line can be known by ap- 
plication to the broker, for good concerns do not shop 
around, but confine their operations to one or two houses, 
and even for a lesser rate would stick to their own broker as 
a matter of good policy. 

There is also that class of paper consisting of notes* re- 
ceived in trade dealings, which are indorsed and sold through 
brokers, and this class is known as "receivables," "two-name 
paper," "endorsed paper," as distinguished from the first- 
mentioned class known as "single-name paper." The great 
Claflin firm issued its paper in the form of receivables. Their 
debtors would pay by notes running to the firm, which the 
Claflin firm would indorse and sell in the market, this paper 
being known as "Claflin Receivables," and was highly 
regarded. 

Single-name paper, while issued for the purpose of con- 
summating a trade transaction, has no evidence that it will 
be used for such purpose. The firm ostensibly borrows to 
take its discounts, and only by communicating with the 
firm's trade connections can this be ascertained; while in 
two-name paper there is evidence of a trade on the face,, 
subject, of course, to accommodation notes and other irreg- 
ularities possible in mercantile dealings. The broker, by 
knowing the demand and supply of paper, is able to regu- 
late the market to a considerable extent. In some places 
money may be in surplus, while in others there will be a 
dearth, and by knowing the market conditions, he can buy 



464 THE PRACTICAL WORK OF A BANK 

where money is needed and sell where investments are 
wanted. 

Commercial Paper as Liquid Reserves 

Banks have seasonal demands. They cannot accumulate 
money all through the summer and keep it idle awaiting the 
fall demand, for this is not good banking; they, therefore, 
buy commercial paper in the spring and early summer that 
matures about the first of September, when the local de- 
mand begins to show itself, and by allowing paper pur- 
chased in the open market to mature, they have funds in 
hand with which to take care of their home borrowers. 

The custom of buying paper in the market has not long 
obtained, it being formerly considered unfair to the commu- 
nity to take funds outside the territory; but as the advan- 
tages of commercial paper as a secondary reserve have be- 
come apparent and with money accumulating in banks fast- 
er than home demand could utilize, the custom has been 
growing all over the country. 

Bonds were formerly regarded as the bank's secondary 
reserve ; but the difficulty of these is, the maturity is not easy 
to regulate, there not being a supply of short-time bonds 
always available. And if longer-time bonds are bought there 
is no assurance that they can be sold at the time of need for 
their purchase price. Sometimes they cannot be sold at all, 
and the rates are, as a rule, lower than commercial paper 
will bring. 

The Cash Discount System 

The cash discount system is an outgrowth of the Civil 
War. At that time and before, it was the custom of a mer- 
chant to buy heavily at periodical times, making annual or 
semi-annual trips to the large city and there select his stock 
for six months or more. He gave his note, or paid upon his 
next visit. He was well known to his jobber and needed no 
other credit than his reputation and standing. 

But after the war, especially in the greenback disturb- 
ances, conditions began to change. As the value of money 
became problematical, the amount the creditor would get at 
maturity became uncertain. He was willing to make a con- 
cession for prompt payment. He, therefore, sold on 



ESSENTIALS IN GRANTING CREDIT 465 

"terms," payment to be made by a certain time, less a dis- 
count if paid before that time. This system has grown to 
be exceedingly popular, and the old method of settling by 
note has disappeared to a large extent. Only in a few lines, 
such as in lumber, agricultural machinery, etc., is the prom- 
issory note now used in any great volume. And as the cash 
discount custom has grown, single-name paper has come into 
wide usage as a method of borrowing, the proceeds being 
used to pay cash for purchases. Instead of the merchant 
giving his debtor his note he now gives him his check, and 
obtains the funds to make his check good from selling his 
paper in the market. 

It is highly profitable for the merchant to take his dis- 
counts, as a simple illustration will show. Suppose the 
terms are 2/10 — net 30; meaning that if payment is made 
within ten days from date of the invoice, two per cent, may 
be deducted. This is equivalent to seventy-two per cent, a 
year, meaning to say that if money were to be made at this 
rate, it would have to earn seventy-two per cent, a year. 
Let us prove the point. A merchant buys a bill of goods 
for $100 payable as above. If he pays it within the period 
he may settle for $98. If he were to require the $100 to 
earn $2 for him in ten days at interest, he would have to 
employ it at the rate of seventy- two per cent, a year; for 
interest on $100 at seventy-two per cent, for the year equals 
$72 — $6 a month, and $2 for one-third of a month. 

On the other hand, the seller could not make the $2 in so 
short a time except by the employment of the principal at 
the rate of seventy-two per cent, a year. Therefore, he has 
lost at that rate. But he has doubtless concluded from ex- 
perience that his discounts will be taken and, therefore, fixed 
$98 as the selling price of the article, out of which he gets his 
anticipated profits ; and if the discounts are not taken, he is 
the gainer — except he has a poor credit risk to deal with. 
He could just as well make the selling price any arbitrary 
figure and allow more liberal discounts, but the above illus- 
trates the point in mind. 

What it Costs a Retailer Not to Get Cash Discounts 

In order to show retailers the high price they pay for the 
privilege of taking full time on their invoices, H. M. Cary 

31 



466 THE PRACTICAL WORK OF A BANK 

of the Theodore Poehler Mercantile Company, Emporia, 
Kansas, has drawn up a table of interest equivalents of a 
few cash discounts. It is presented in the May bulletin of 
the National Association of Credit Men. 

According to Mr. Gary's table, one per cent, in ten days 
in a thirty-day bill means eighteen per cent, per annum. He 
gives this example: Invoice, $1,000, thirty days net, one per 
cent, for cash in ten days. If the merchant pays in ten days 
he receives $10 cash discount which, in effect, is the interest 
the wholesale house pays him for the use of $1,000 for the 
twenty days' unexpired time. This is at the rate of eighteen 
per cent, per annum, for the interest on $1,000 for twenty 
days at eighteen per cent, is $10. Other examples are given 
as follows: 

Invoice $1,000, terms sixty days net, 2 per cent, for cash in ten days; discount 
§520, unexpired time 50 days, interest equivalent, 14 4-10 per cent, per annum. 

Invoice $1,000, terms six months net, 6 per cent, for cash in thirty days; 
discount $60, unexpired time five months, interest equivalent, 14 4-10 per cent, 
per annum. 

Invoice $1,000, terms four months net, 4 per cent, for cash in thirty days; 
discount $40, unexpired time three months, interest equivalent, 16 per cent, 
per annum. 

Invoice $1,000, terms six months net, 6 per cent, for cash in sixty days; 
discount $60, unexpired time four months net, 6 per cent, for cash in sixty days; 
discount ^60, unexpired time four months, interest equivalent, 18 per cent, per 
annum. 

Commenting on the table the bulletin says: "The above 
few examples will show what a heavy disadvantage the re- 
tailer works against when he takes full time on his bills. 
He could borrow money to discount his purchases and make 
six per cent, to ten per cent, on the transaction, besides keep- 
ing his business in hand better than he possibly can when 
he owes a large number of wholesale houses." 

Commercial Paper and the Federal Reserve Banks 

The ostensible purpose of single-name paper is to take 
advantage of these cash discounts, and all well-managed con- 
cerns endeavor to do so, and failure is indicative of trouble. 
It is profitable as has been shown, and money cannot be 
made easier than by taking these concessions. The danger 
lies in the unscrupulous paper broker, who urges his client to 
put out more paper than is necessary for the business, in 
order to take advantage of a cheap market, and this leads 
to overtrading and over-extension. 



ESSENTIALS IN GRANTING CREDIT 467 

The enactment of the Federal Reserve Law, which had 
for one of its primary purposes the rediscount of commer- 
cial paper, led to a widespread interest in this subject, 
and a division of opinion as to the relative merits of each 
class of paper, single-name and two-name, the latter called 
receivables. The latter form of paper more nearly resembles 
the "acceptance" in use in Europe, since it carries a double 
obligation, which single-name paper does not. 

The definition of paper that would be acceptable to the 
Federal Reserve Banks was awaited with uncommon inter- 
est on the part of the banking fraternity. It afTected every 
bank that expected to rediscount. It affected business in 
the discrimination that would be made against either class. 
It had in it the possibility of revolutionizing American busi- 
ness methods. It had danger. 

Clearing-houses and bankers had been appealed to, to 
suggest what kind of paper should be selected. Views in- 
numerable were advanced, for and against both kinds, but 
one thing was agreed upon, and that was, in accord with 
the intent of the Federal Reserve Act, the paper should 
arise out of a business transaction — an exchange of com- 
modities. 

Just how this was to be ascertained was the problem. 
Some clearing-houses favored a statement on the paper that 
it was for such a purpose, but the question of negotiability 
arose. Others made it a part of the bank's business to as- 
certain this and to certify to it. But on the tenth of No- 
vember, 1914, the Federal Board issued its definition and 
description of the paper it would receive for rediscount. No 
doubt the war conditions had much to do with the liberal 
definition, and it was probably framed in the light of pres- 
ent events. 

The board lays down the basic rule that the paper should 
arise from a commercial transaction. It should be self- 
liquidating. It should, as the board puts it, "represent in 
every case some distinct step in the productive or distribu- 
tive process — the progression of the goods from the pro- 
ducer to the consumer. The more nearly these steps ap- 
proach the final consumer, the smaller will be the amount 
involved in each transaction as represented by the bill, and 
the more automatically self -liquidating will be its character." 

But before treating the subject of the board's ruling, let 



468 THE PRACTICAL WORK OF A BANK 

us review the advantages and disadvantages of each class of 
paper. 

In the single-name paper, economy of effort is realized. 
It comes in large and uniform denominations. Take a typ- 
ical case. Here is a merchant, let us say, with $300,000 of 
debts, representing 3,000 invoices. He borrows $300,000 
on sixty $5,000 notes and pays by check. If he were to give 
his creditors his notes of hand — two-name paper — he would 
issue 3,000 separate pieces of paper, have to record their 
details and arrange to meet them when due. 

His bookkeeping would be much congested by such a 
process, and so would the systems of all who handled the 
paper, particularly the banks. 

As before suggested, single-name paper is a development 
arising out of the desire of traders to shorten the time of 
settlement, and in order to do so, concessions are given if 
payment is made before a certain date. It has placed the 
country on practically a cash basis. It has shortened the 
term of credit. Moreover, the customs have become so firm- 
ly ingrained upon the business interests of the country that 
to change them would be quite impossible. 

The safety of single-name paper is largely assured (a) 
by the standing of the broker, who is supposed to make care- 
ful study of the risk for his own sake and to handle only 
high-grade paper. He should have an audit, and a state- 
ment, as a protective measure. He has a reputation to 
sustain, (b) By analysis of the statement and correspond- 
ence with banks that have handled the paper. 

The losses have been trifling in those banks where single- 
name paper has been favored — so small as to be inconsequen- 
tial. While the losses in single-name paper have not been 
large, there have been, however, failures which have been 
serious in this respect, notably the failure of the Westing- 
house Company and the Pillsbury Flour Company a few 
years ago. The possible losses from single-name paper are 
classified by Mr. Owen Shepherd of the International Paper 
Company as follows: 

1. Dishonesty on the part of the broker. 

(a) In selling forged paper (This is a rare occurrence) ; 
(b) in putting out paper of known bad concerns; (c) 
through collusion with those who desire to issue paper dis- 
honestly. 



ESSENTIALS IN GRANTING CREDIT 469 

2. Inability on the part of the broker. 

(a) In being misled as to his client's standing; (b) in 
engaging his customers to issue more paper than they are 
justified in doing; (c) by accepting improperly authorized 
paper. 

3. Dishonesty on the part of the maker. 

(a) Through false statements; (b) through flotation of 
paper not properly recorded; (c) through manipulation of 
the books, keeping duplicate sets, or by other means pre- 
venting public auditors from ascertaining full knowledge 
of the indebtedness of the maker, 

4. Inability of the maker. 

(a) By undertaking larger business than his capital war- 
rants; (b) through over-expansion due to a desire to specu- 
late in his business by overbuying for a prospective rise in 
prices or otherwise. 

5. General over-expansion in many lines which might 
lead to panic and financial ruin. 

6. Failure due to apparently unavoidable circum- 
stances. 

Two-Name Paper 

While single-name paper is for the purpose of liqui- 
dating an account receivable, two-name paper is the embodi- 
ment of the account receivable. It settles a debt. It is 
drawn in odd amounts and bears prima facie evidence of its 
purpose. It may, of course, be "kited" — one firm giving its 
note in exchange for that of another, but collusion is possible 
in all business dealings. 

Inasmuch as "receivables" carry the strength of two 
names, and have evidence of the trade transaction out of 
which they arose on their face, they are most desirable. But 
these instruments are not so readily obtained as the single- 
name paper, the latter, according to commercial paper men, 
predominating to the extent of fully ninety per cent. The 
endorsement of the payee not only authenticates the note, 
but adds strength to it. 

The Federal Reserve Board indicates its leaning to two- 
name paper when it says: "Double-name paper drawn on a 
purchaser against an actual sale of goods affords from the 
economic standpoint of view, prima facie evidence of the 
character of the transaction from which it arose. Single- 



470 THE PRACTICAL WORK OF A BANK 

name notes, now so freely used in the United States, may 
represent the same kind of transactions as those bearing two 
names. Inasmuch as the single-name paper does not show 
on its face the character of the transaction out of which it 
arose — an admitted weakness of this form of paper — it is 
incumbent upon each Federal Reserve Bank to insist that 
the character of the business and the general status of the 
concern supplying such paper should be carefully examined 
in order that the discounting bank may be certain that no 
such single-named paper has been issued for purposes ex- 
cluded by the act, such as investments of a permanent 
nature." 

The open account selling, which is a development of the 
single-name paper, makes possible a postponement of pay- 
ment, the obligation of the open account being easier to de- 
lay in its payment than a negotiable instrument. The as- 
signment of the book accounts — the most liquid asset of the 
firm next to cash — is also possible, and, if so, the issue of 
single-name paper makes a weakened state of affairs. Bor- 
rowers have been known to have borrowing accounts in 
twenty-nine institutions in New York State and others have 
borrowed in thirty different names. 

There is this to be said, however, that in liquidating two- 
name paper it is more difficult to renew a note than to issue 
paper in the market. If the seller will not give an extension, 
the extended two-name paper cannot arise. It must be paid 
if not extended, or some other lender found who will take 
it, unless the paper is to be sold through the brokers and 
thus have the open market as the field. Single-name paper 
is never given to the seller — he gets the proceeds in form 
of a check — for to issue to him single-name paper would 
make it double name when negotiated. 

Paper that is paid by the issue of other paper is un- 
sound. It should be paid from the proceeds of the mer- 
chandise which it carried. It should liquidate itself. Fixed 
loans should not be financed from the proceeds of marketed 
paper. The endeavor of the Federal Reserve Board has 
been to eliminate this risk. And if several brokers are em- 
ployed by the same firm, there is no effective check on the 
amount of paper issued. 

In a brief filed with the Federal Reserve Board by the 



ESSENTIALS IN GRANTING CREDIT 471 

Merchants Association of New York concerning the quality 
of paper eligible for rediscount, it was said: 

"All negotiable commercial paper is of one of two classes: 
(a) bills of exchange, or orders to pay money, and (b) 
promissory notes, or promises to pay money. The two 
classes may be further distinguished by the time of pay- 
ment, which is either on demand or at some fixed future 
date. Checks and sight drafts are demand bills of exchange, 
differing only in form. A bank note is a demand promis- 
sory note. The questions of credit involved in these forms 
of commercial paper do not involve a postponement of pay- 
ment, and so far as our banks are concerned no action of the 
Federal Reserve Board seems to be needed to work any 
changes in the customs surrounding their use, which ade- 
quately protect all temporary holders from loss by their 
acceptance. 

Unsecured promissory notes bearing interest, and pay- 
able "on demand," while purporting to be call loans on per- 
sonal security, are for the most part loans repayable at the 
pleasure of the borrower. Collateral notes payable at a 
fixed date or on demand, and secured by Government bonds 
or notes, are expressly relieved from the prohibition against 
notes based on a pledge of investment securities and their 
quality with respect to ultimate payment is well established. 

There remain to be considered, therefore, only those va- 
rieties of time paper based on personal credit or on merchan- 
dise. These are: 

1. The bill of exchange payable at a specific date after 
sight, and accepted by the drawee — one variety of bills of ex- 
change. It may be secured by bill of lading for merchandise 
which may be released or not released to the drawee upon 
acceptance. 

2. The promissory note in settlement of sales — endorsed 
by the seller. 

3. A note or draft endorsed for accommodation. 

4. The promissory note secured by pledge of mer- 
chandise. 

5. The unendorsed promissory note — single-name 
paper. 

1. Bills of exchange drawn for acceptance at thirty 
days to six months' sight either with or without bills of lad- 
ing for the merchandise attached, are now rarely used in the 



472 THE PRACTICAL WORK OF A BANK 

inland trade. They would be applicable to transactions in 
the great staples such as cotton, wheat, corn, oats, and other 
agricultural products. But transactions in these staples 
have been freed by the produce exchanges from time credits, 
and are now very generally on a cash basis. Were there a 
supply of this class of paper it would doubtless form one of 
the safest as well as fluid forms of investment for Fed- 
eral Reserve discounts. Bills of exchange, based on sale 
transactions, are normally self -liquidating. 

In connection with manufactured commodities such as 
dry goods, groceries, hardware and the like, bills of exchange 
became obsolete many years ago owing to a variety of causes 
which may be here summarized, viz. : 

(a) The reduction of the customary term of credit from 
six or eight months to ten, thirty or sixty days. 

(b) Uncertainty of the amount due by reason of dis- 
counts offered for prepayment, by which the term of credit 
is made flexible, at the buyer's option. The general effect of 
this process is that all houses in liigh standing finance them- 
selves so as to pay cash for all their purchases. 

(c) Uncertainty as to the amount to be paid owing to 
the substitution of implied warranties of the goods sold in 
place of the old rule of caveat emptor. 

(d) The change in the custom of buying, made possible 
by improvements in transportation during the last thirty 
years, whereby instead of making a few large shipments of 
merchandise, buyers now make a large number of small pur- 
chases. While the average size of the bills in the sales of 
large wholesale houses in the seventies was over $1,000, it is 
now less than $100. It is not practicable to settle accounts 
of such small size with bills of exchange. (See appendix.) 

(e) The facilities extended to the country merchant by 
local banks, which have everywhere multiplied. These banks 
find a profitable use for their funds in making loans to local 
merchants who are thus enabled to buy merchandise advan- 
tageously on the shorter terms now prevalent, and to avoid 
the long credits which in former days were furnished by the 
seller of the goods and paid for in the price. Credit prices 
are always higher than cash prices. 

For these reasons the bill of exchange has become obso- 
lete in nearly all branches of trade in manufactured goods, 
except where the conditions above referred to are upset by 



ESSENTIALS IN GRANTING CREDIT 473 

forced trade sales at auction. In this case, notes or bills are 
given in payment mostly by second and third-rate debtors, 
all others preferring, in ordinary times, to settle on short 
time with cash. 

2. What is true of the use of bills of exchange is also 
true of the use of promissory notes in settlement of trading 
accounts receivable, and for the same reasons. At present 
such promissory notes as are given for merchandise accounts 
are quite well understood to represent settlements of over- 
due accounts receivable or extensions granted to weak debt- 
ors ; strong houses hesitate to endorse and sell these notes 
knowing that they are the least liquid of all their receivables ; 
and that a transaction of this kind, disclosed, will besmirch 
their own credit. By average from one-quarter to one-third 
of such notes go to protest and are paid by the endorser. 

Promissory notes, however, are given by consumers in 
large volume in part settlement of debts for farm machinery, 
automobiles, wagons, tools, etc. A large part of these notes 
are very good; but being drawn by persons of meagre bank 
credit, and not under the influence of business habits, are not 
always paid promptly at their maturity. Such notes are fre- 
quently endorsed and used as collateral for the promissory 
notes of their holders. They give a self -liquidating character 
to the notes which they support, and should be excellent col- 
lateral security when protected by sufficient margins to fore- 
fend the average percentage of default. They would seem 
to fall within the compass of the broad definition of the 
second paragraph of section thirteen. 

3. Promissory notes endorsed by sureties for accommo- 
dation form the great bulk of the double-named paper held 
by our banks. Such accommodation paper is good provided 
it is not used as a means of financing the inactive assets of 
both maker and endorser. It does not represent a real trans- 
action between them. As a means of providing capital at the 
start for able men of limited means it is a device of value. 
Notes of such men are dependent in a much larger degree 
than any other kind of paper upon the character and ability 
of the maker. He gets the endorsement because he needs the 
third element of good credit — capital. The valid foundation 
for the prejudice against accommodation endorsement is not 
the fact that usually a note so endorsed represents a future 
rather than a past transaction; for a past transaction is just 



474- THE PRACTICAL WORK OF A BANK 

as likely to be foolish, and, therefore, not to pay the note, as 
a future transaction. But they are clouded by the question 
of the quid pro quo given to the accommodating endorser. 
If a reciprocal endorsement is given in return, and secretly, 
there is the certainty of inflation by the production of two 
notes where one only is needed by trade demands. They 
are connected in the lender's mind with the practice, of 
dubious morality, of not acknowledging the endorsements as 
liabilities, until the maker has defaulted. Nobody likes to 
lend money on mysteries. 

When the endorsement is that of a concern affiliated by 
common ownership, it adds nothing to the responsibility be- 
hind the note, but may mislead the uninformed. It is only 
where an endorsement or acceptance is from a party thor- 
oughly independent of the maker that it is of any value; 
and in such case the nature of the consideration should be 
disclosed in order to forefend distrust. The safety of such 
bills depends entirely upon an intimate knowledge possessed 
by the discounting bank of the character, ability and means 
of both, parties to the transaction, and they are, therefore, 
unfitted for open market transactions. And when made on 
a large scale, as in a recent deplorable instance, they are a 
distinct menace to financial weal. They are in no sense 
self -liquidating. 

4. Promissory notes secured by merchandise are men- 
tioned specifically in the latter part of this section of the act. 
Unsold merchandise is of undeterminate value, and a note 
based upon it is no more self-liquidating than the merchan- 
dise itself. Like all other speculative notes they require a 
continual scrutiny of the markets for the merchandise by 
which they are secured. Such notes are often given by man- 
ufacturers for purchases of raw materials, in which case they 
are generally paid off when the raw material is drawn from 
warehouses and used in production. Notes secured by mer- 
chandise are not self-liquidating, as they require the effort 
of selling to provide the funds wherewith to pay. 

5. Single-name paper. Our modern American methods 
of cash or short maturity transactions, modified to a degree 
by customs of delivery of certain classes of merchandise in 
advance of the selling season, give rise to vast amounts of 
book accounts receivable, payable at fixed dates, but subject 
to the indeterminate influences of flexible terms of credit and 



ESSENTIALS IN GRANTING CREDIT 475 

of implied warranties, the two collectively producing a mean 
variation of between two and three per cent. These being 
incapable of the certainty prerequisite to note settlement, 
it has become the custom of the wholesaler to obtain capital 
for further operations through the sale on the open mar- 
ket of his plain promissory note for a round amount, ad- 
justing its maturity to that of his book accounts receivable, 
so as to give a self -liquidating quality to his own notes. 

In its current form it represents a past transaction just 
as much, if not so specifically, as a bill of exchange. Such 
paper has always been in demand from bankers and in times 
of trouble the self -liquidating quality transmitted from the 
book accounts behind it has made its recurrent maturities the 
chief cash reliance of the banks, taking the place of the se- 
cured call loans which, theoretically liquidable on demand, 
are at such times congealed by the stoppage of markets, and 
unsalability of collaterals. No moratorium has ever been 
demanded for the single-name promissory note, even when 
the banks generally have failed in their obligation to pay 
cash to their depositors, or gold to their note-holders; nor 
even when its makers may have asked for delay in the settle- 
ment of their book accounts payable. Such notes can be put 
in the status of two-name paper only by accommodation 
endorsement. 

If required by law, or by regulation of the board, two or 
three-name paper will be manufactured to order. It will 
then represent the obligation of the less scrupulous of trad- 
ers, and will be subject when made in a large way to the dis- 
advantages adherent to accommodation endorsement for pur- 
poses of finance. 

But it is clear, from the nature of the mercantile prom- 
issory note, endorsed or unendorsed, that it is either issued 
or drawn for "commercial purposes or the proceeds of which 
have been used or are to be used for such purposes," and so 
within the inclusions of the act. 

Discount Market 

The value to our business as well as to our finance of an 
open discount market, such as prevails abroad, and of an 
entrance into the international discount market, is not to be 
underrated, even though the immediate importance of the 



476 THE PRACTICAL WORK OF A BANK 

question at this crisis may seem small. But it is clear, if our 
analysis of the existing stage of development of business cus- 
tom in the United States is correct, that there is no way by 
which inland bills of exchange, such as foreign dealers are 
accustomed to, can be created through purely business trans- 
actions, out of the first-class obligations now current and 
likely to remain current in this country. If forced by law 
or regulation, fictitious situations can doubtless be created, 
which will give rise to specious imitations of the article de- 
sired ; but with such transactions the more honorable part of 
the commercial community will have nothing to do. The 
only result of such attempted regulation would be to discour- 
age straight dealing, and to create a second-class security in 
place of a prime obligation such as now exists. 

Out of this dilemma there are two avenues of escape. 
The first is the education of the foreign bill broker to our 
credit methods ; the second is the open acceptance or accom- 
modation endorsement for a consideration of inland trade 
drafts by banking institutions, such as has already been 
begun by several of our leading financial institutions. This 
practice affords the guaranty of large and imposing capital 
to a finance bill capable of currency in any market of the 
world. Of course, in case any Reserve Bank should 
wish to use the international market it could make bills of 
the very highest class by adding its endorsement to the con- 
tents of its portfolio; a process which if not now legalized 
might easily be the subject of legislation in the future. 

It is plain from the foregoing analysis and description of 
the various kinds of commercial paper currently used in 
transactions described as admissible under the act, that the 
final criterion of any given piece of paper is the credit of its 
maker; that credit is dependent in part upon the character, 
in part upon the ability, in part upon the capital of the man 
or men who accept the responsibility for it by their signa- 
tures. As to whether any given piece of paper is worthy of 
discount by a Federal Reserve Bank is a question which 
must be decided by the officers of the bank itself. They 
have every means of arriving at a judgment on the question 
involved. They are usually close enough to the transaction 
which it represents to warrant a valid judgment. 

Considering the past success of our banking system in 
selecting notes of the best class for their portfolios is it not 



ESSENTIALS IN GRANTING CREDIT 477 

likely, at least at the start, that if unhampered by any regu- 
lations, the directors of the Reserve Banks are allowed to 
discount for their banks those kinds of paper with which as 
bank officers and as merchants they are most familiar, the 
best results will presently be attained? In case of any ex- 
ception to this probability, the Reserve Board has three 
representatives on the directorate of every Reserve Bank to 
warn it of reckless conduct or of impending trouble. Trade 
customs which have been built up by generations of wise and 
successful business men and bankers, in the slow process of 
adapting their methods to necessary economies in distribu- 
tion, and to the needs of the seventeen hundred thousand 
firms, individuals and corporations, actively trading in this 
country, cannot wantonly be overturned without peril both 
to the economic and moral health of the business and bank- 
ing structure. And for these reasons, we urge that in exer- 
cising your right of determination and definition, or with- 
holding from the present exercise of that right as you deem 
most proper, you will agree with us "that commercial paper 
in the present form and use be accepted by the Federal Re- 
serve Board from member banks for discount and currency 
issue purposes." 

Appendix 

Computation showing result in terms of commercial 
paper issues and of office detail, of changing (a) the pres- 
ent short-time system of settlement in sales of manufactured 
goods to (b) that of settlement by four months' bills of 
exchange. 

The merchandise is supposed to be, at first cost, of $12,- 
000 annual value, distributed from manufacturer to whole- 
saler at the rate of $1,000 per month in two equal shipments 
of $500 each; and from wholesaler to retailers, with twenty 
per cent, gross profit, also in equal monthly installments in 
forty shipments averaging $30 each. 

Notes Debt 

A. On present terms Created Created 

Constant debt from wholesaler to manufacturer, open acct. . . $500 

Note of manufacturer to carry this debt with 20 per cent. 

margin $400 

On average of forty days, constant debt from retailer to 

wholesaler 1,600 

Note of wholesaler to carry same with 20 per cent, margin . . 1,300 

Constant debt created, notes and open accts $1,700 $2,100 

in one year, total of six months paper, pieces created 4 



478 THE PRACTICAL WORK OF A BANK 

B. On four months credit settled by bill of exchange or note 

1 Transaction between manufacturer and wholesaler, due 

continually 4x1000 *>°°0 

2 Transactions between wholesaler and retailers, due con- 

tinually 4x1200 "•••• 4 » 800 

Constant debt created '. $8,800 

Notes needed to settle debt from wholesaler to manufac- 
turer, 8, of $500 each equals $4,000 

Notes needed to settle debts from retailers to wholesalers, 

160, of $30 each equals 4,800 

Notes constantly in circulation $8,800 

In one year, total number of pieces created of four months 

paper, 168x3 equals 504 

Results compared: 

Amount Pieces 

Note settlement basis — paper outstanding $8,800 

(Notes annually required) 504 

Present settlement basis — paper outstanding 1,700 

(Notes annually required) 4 

Increase $7,100 500 

Increase in amount of outstanding paper , . 417% 

Increase in annual office operations 12500 per cent. 

It will be observed that under present terms the amount of paper created to 
carry the entire series of transactions is less than the total amount of debt 
created by such transactions, while under the bill of exchange plan the notes 
are equal to the debt created. This means a lowering of the self-liquidating 
quality of the bill of exchange, as compared to the promissory note, with margin, 
based on book accounts receivable. 

The Commercial Paper Broker 

The commercial paper broker is a development of the 
last fifteen or twenty years. His business is now enormous, 
covering the whole country, both in buying and selling 
paper. He has a finely organized credit department, and a 
body of trained salesmen. He is the go-between for the bor- 
rower desiring accommodation and the banker desiring in- 
vestment. He fulfills a very important and useful service in 
the economic scheme. He knows where paper can be sold. 
He knows where paper can be bought. He "makes" the 
money market, or at least knows where it is. 

At first he was strictly a broker. He got his commission 
for selling, and paid for the paper only when sold. But he 
has grown to such proportions and is of such wealth and 
with such good banking accommodations that he can now 
send his check upon receipt of the paper, less his commission, 
usually one-quarter of one per cent, for three months' paper. 
In many cases he now buys the paper outright, pledging it 
as security with his bank, if need be, or, as is the case in a 



ESSENTIALS IN GRANTING CREDIT 479 

few instances, is strong enough in his own capital to pay 
outright for it. If he has no market he may advance on the 
paper ; or if the market is too high, he may do likewise, and 
sell when conditions are better. 

The broker sells for cash, but often under a week or ten 
days' option. He does not indorse the paper, nor guarantee 
its payment; but he does morally and in law guarantee that 
it is regular. He has the facilities to determine this. His 
credit department has records of every borrower, who should 
sign, and under what conditions, and the fact that he offers 
it is guarantee of its genuine character and of his opinion as 
to its worth. 

It has been discovered that firms which could not sell 
their single-name paper, have, at the instigation of unscrup- 
ulous brokers, drawn notes in odd amounts, and exchanged 
them, each indorsing for the other, and when offered on the 
market as receivables, they have all the earmarks of legiti- 
macy, but are accommodation paper, pure and simple. Of 
course such a firm should be eliminated from the loaning list 
as soon as this is discovered, and no reputable broker will 
handle their paper. 

Competition has, of course, brought some undesirable 
elements into the field, but as a whole the commercial paper 
broker is of high character. 

Buying Paper on Option 

Many banks buy on option running from a week to the 
date of the next board meeting. Paper so bought is put 
under examination and if it does not meet full approval is 
returned. When returned the interest earned during the 
time the bank had the paper is, of course, paid. Banks 
dealing with one or two houses will, in the course of time, 
establish favorable relations and deal in all fairness one with 
the other. 

The average banker is not in a position to judge a risk 
a thousand miles away. He cannot analyze a statement ; he 
depends upon his city correspondent to select his paper and 
buys on the latter's recommendation. But it requires no 
more ability to judge foreign paper, than it does to judge a 
loan at home, provided the two are analyzed from the same 
data. The concerns may be larger and, therefore, a little 



480 THE PRACTICAL WORK OF A BANK 

more difficult to pass judgment upon, but the principles are 
the same. But a bank may select a few well-known names 
and becoming familiar with these make its purchases accord- 
ingly. 

Whether a bank buys on its own investigation or on 
the advice of its correspondent, it should make the research 
as a matter of knowledge, and cover practically the same 
ground as its correspondent has covered in order to recom- 
mend the paper. Paper offered by the broker is accom- 
panied by a statement of condition, with names of banks 
that have bought the paper, and trade references. The bank- 
er should analyze the statement, communicate with the ref- 
erences, and, in addition to suggestions already made, ob- 
serve the following: 

The broker — Is he well known, well established, conser- 
vative, and offering the best names on the market? Is he 
morally and financially responsible? Is he merely a broker 
— an offerer — or does he buy and sell outright? Is he a 
strong man? The city correspondents will advise on this 
point. 

Is the business of the borrower a substantial one? How 
old? Is it a staple line? Is it a different line than you loan 
to locally? Has the borrower ample capital? What is the 
purpose of the paper offered? Is the management honest, 
capable and energetic? You must know that the business is 
administered by brains, or it is not a safe risk. No plungers, 
or get-rich-quick propositions, and the men must know econ- 
omy and practice it. Does the statement analyze well? Does 
the trade think well of the concern? What do the local 
banks say? What do his competitors say? 

Buy of large concerns, those having total assets of, say, 
half a million or more. Scatter the risks. Check carefully 
through banks having held the paper. Check through the 
trades. Buy only where the margin of safety — assets to 
liabilities — is at least two to one, except it may be in such 
lines as meats, etc., where a less margin is permissible. Buy 
paper of firms which have been recently audited by certified 
public accountants. Buy of established firms dealing in 
staple products and not those arising from fashions and 
luxuries. Eliminate the fixed assets entirely from the credit 
statement and regard them only as backbone to strengthen 
the credit structure. 



ESSENTIALS IN GRANTING CREDIT 481 

It is well to classify paper by States or districts, and for 
this a loose-leaf ledger is used. The name of the city, town 
or State is placed opposite the months of the year running 
across the page. Each State may be given a section in the 
book and the various places separate leaves, so that the exact 
amount of paper in each large city will be known. 

Paper held may also be classified by industries, so that 
the risk in each line may be known; for what will affect one 
line will not affect another. A good season in one industry 
may be a poor one in another, and it is well to have the lines 
scattered as to industries as well as to sections. 

The location is important. The retailer should be in a 
good shopping district, the manufacturer near good ship- 
ping facilities. The latter's transportation costs are a main 
factor, both as a saving in freight and also in cheapness of 
raw material. Labor supply and living conditions affect 
manufacturing, while the appearance of the store, the stock, 
and the general aspect of the place are important in selling 
goods, and have their bearing on the credit risk. 

As a rule, not more than from one-fourth to one-third 
the excess of quick assets over quick liabilities is considered 
the limit of borrowing, where the ratio of quick assets to 
liabilities is two to one. The credit is rapidly restricted 
where the ratio is less. Where the assets are practically cash, 
as in cotton or grain, the ratio may be larger with safety. 

It is the policy of some firms to clean up and go out of 
debt at various times, and while such concerns as meats and 
groceries will have a steady output of paper, because of the 
steady trade, such a line as millinery, which is seasonal, 
should clean up when the selling season is over and the 
stocks have been turned into money. Likewise wool. It is 
all bought in a few months, but sold throughout the year, 
and so wool debts should grow less and less as the season 
wanes. 

It is important to know the borrower's annual sales in 
order to know how often he turns his capital over. If the 
capital is turned but twice a year it indicates slow sales ; but 
if turned six times it means that one dollar does the work 
of six, and costs the price of one. The business is liquid 
only as it turns the stock, bringing in a constant stream of 
new goods and money, and getting rid of the old. 

It is told of the late Benjamin Altman that he had as 

82 



482 THE PRACTICAL WORK OF A BANK 

a settled policy the quick moving of goods. An article was 
placed on sale at its regular selling price. If it did not move 
quickly at that price, it was reduced. If then it did not 
move, it was marked down every Friday until it sold; and 
such a policy resulted in quick sales, and no dead stock. 

The loan to a manufacturer is for the purpose of bridg- 
ing the time between raw material and finished product, and 
should liquidate itself when the material is turned into fin- 
ished form. Loans to farmers are for the purpose of plant- 
ing, fertilizing and harvesting and should liquidate them- 
selves when the harvest is gathered. 

A wholesaler who turns his stock six times a year should 
not borrow over one-sixth of his sales, and his terms of credit 
should not be longer than his terms of sale. Loans to a 
retailing merchant are to enable him to carry his stock until 
sold, and if the stock is liquid and his sales quick, and his 
management active and aggressive, he should promptly 
liquidate his debt; but if he buys unseasonable stock, unsal- 
able stock, and has poor selling methods, he cannot pay, for 
goods on the shelf never pay bills. 

Answering Credit Inquiries 26 

Much of the credit information is obtained by corre- 
spondence. In writing the answer to a credit inquiry, you 
are generally justified in assuming that your correspondent, 
unless he has indicated special information desired, wants to 
know about the same things you would under similar cir- 
cumstances. A well balanced letter gives first, a brief his- 
tory of the business, its form, whether firm or corporation; 
if the first, the members; if incorporated, the date, State 
laws, authorized and paid-in capital, and essential facts re- 
garding important changes, special processes owned or con- 
ditions which give the concern an advantage or operate 
against it. 

The next paragraph may be devoted to the consideration 
of the financial standing. If you have figures which can be 
used without breach of confidence and the nature of the in- 
quiry indicates that your correspondent does not have them, 
it is well to briefly summarize the statement. If the subject 
of your letter sells paper in the street and the inquirer 

2«F. B. Snyder ante. 



ESSENTIALS IN GRANTING CREDIT 483 

would ordinarily have a statement furnished by the broker, 
it is well to make such comment on the various items as your 
investigations justify. 

In writing regarding one of your own customers, a brief 
explanation of some unusual feature in his statement will 
often clear up a vexing point and make a sale of his paper. 

The third paragraph is devoted to a summary of the re- 
sults of such bank and trade investigation as you have made 
and is complete opinion of other people regarding the name. 
The letter may well be concluded with a short explanation 
of your own opinion and your attitude toward the risk. 

Rediscount of Paper in Federal Reserve Banks 

Commercial paper will, under the Federal Reserve Sys- 
tem, have added usefulness and dignity, in that it will be 
readily discounted by the Federal Reserve Banks and will 
form the basis of the Federal Reserve notes. 

In defining commercial paper the Federal Reserve Board 
announced certain fundamental principles. In brief they are: 

That no bill shall be admitted to rediscount by a Reserve 
Bank the proceeds of which have been or are to be applied 
to a permanent investment. Maturities of discounted bills 
should be well distributed, so that a Reserve Bank should be 
in a position to liquidate one-third of all its investments 
within thirty days. Bills presented for rediscount should be 
"essentially self-liquidating," which as the board explained 
means that they should represent some distinct step in the 
productive or distributive process and be of such character 
that it is reasonably sure that they can be collected at matu- 
rity. 

In addition to these principles the board requires that 
such paper be indorsed by the member bank offering it for 
rediscount ; that the indorser bank waive demand notice and 
protest ; that such paper be issued or drawn for agricultural, 
industrial or commercial purposes or the proceeds of which 
have been so used; that if in the form of acceptances they 
must be based on transactions involving the importation or 
exportation of goods and have a maturity of not longer than 
three months. Acceptances must be indorsed by a member 
bank, and the total amount offered by any member bank 
shall not exceed one-half its paid-up capital and surplus. 



484. 



THE PRACTICAL WORK OF A BANK 



Real Property Statement 

for First National Bank, Jamaica, N. Y. 

Owner.,... Deed ronrvrHprl 


T 


Location 










Character of building.... 

Annual rental $ 

Assessed value $ 

Mortgages 
(1) Amount 






Value of lot $ 








Value of building....$ 








Total $ 




$ 


. 


Held by 
















(2) Am<vnr | t- 






$ 


Held by 
















(3) Amount 

Held by _ 
















Bank's Appraisal 

Land .... $ 

Buildings $ 




Total mortgages ....... 

Equity 

Signed. 
Date 

Appraised 


— $ 


$ 


« 


by 




Total $ 

Date 






















- 



BORROWERS' ASSETS FREQUENTLY CONSIST LARGELY OF REAL ESTATE EQUITIES. THIS FORM SHOWS 

THE VARIOUS DETAILS IN CONNECTION WITH REAL PROPERTY THAT ARE 

ESSENTIAL IN ARRIVING AT A CORRECT VALUATION. 



ESSENTIALS IN GRANTING CREDIT 485 

The board also announced that for the present it has 
fixed the limit which a Reserve Bank may rediscount paper 
"for agricultural purposes or based on live stock" having 
not more than six months maturity at twenty-five per cent, 
of the capital of the bank. This limit may be increased in 
agricultural districts in time of need. 

Temporarily certified public accountant's statements will 
not be required, but it will eventually lead to this. The 
statement must be under oath. It should describe the busi- 
ness. It should contain the balance sheet and profit and 
loss account. Assets should be divided into quick and liquid 
assets, and liabilities likewise. Short-term paper should not 
be sold against permanent improvements. The statement 
must show the maximum amount the firm expects to borrow 
in the market. Consent of the member bank must be ob- 
tained if this limit is exceeded. The affixing of the stamp 
(page 592) is equivalent to a declaration that the statement 
has been analyzed. Notes, drafts and bills of exchange which 
are issued or drawn for the purpose of carrying or trading 
in stocks, bonds or other investment securities (except bonds 
and notes of the United States) are clearly excluded. The 
act further excludes notes, drafts and bills of exchange cov- 
ering "merely investments," and from this point of view 
are to be excluded all bills whose proceeds have been or are 
to be used in permanent or fixed investments of any kind. 
Agricultural, industrial and commercial purposes cannot be 
held to include investments in land, plant, machinery, per- 
manent improvements or transactions of a similar nature. 
Bills must arise out of actual commercial transactions, and 
the proceeds must have been used or are to be used for agri- 
cultural, industrial or commercial purposes. They are not 
eligible when drawn to cover merely speculative investments. 

Deductions of a Credit Man in Analyzing Business 

Statements 27 

No department of businsess administration offers a 
broader or more inviting field than the credits ; for in the ad- 
ministration of a credit department, all that a man may 
know of men, business and business methods can be applied 

2TAddress by the author before Baltimore Chapter, American Institute of 
Banking, January 7, 1915, which summarizes and applies the foregoing principles 
in the analysis of credit statements. 



486 



THE PRACTICAL WORK OF A BANK 



LIABILITY RECORD 



Borrower 



Business 



Address 



Security held 















Line of Credit, $ 




AS MAKER 


AS ENDORSER 


















































































































































































































































































AVERAGE BALANCES 


DIGEST OF STATEMENT 


Month 


Av. Balance 


Month 


Av. Balance 


Assets 




















Acc'ts Receivable 

Bills Receivable 

Merchandise™ 






Total.™ - — 










Realty Equities. 

Other " 

Liabilities 

Ace'te Payable. 

Bills " 










TotaL 






1 














Net Worth. .~ 






Ratio >.. 













LIABILITY RECORD WITH DIGEST OF STATEMENT 



ESSENTIALS IN GRANTING CREDIT 487 

in full measure. The credit department is a department of 
opportunity and applied knowledge. The credit man meets 
the executives and his work is executory. Whatever he ac- 
complishes is quickly noticeable and his work gains immedi- 
ate recognition. It, therefore, is attractive from the stand- 
point of its possibilities. Inasmuch as one of the fundamen- 
tal functions of the bank is to loan money, and its profits 
come from loaning money safely, the credit department be- 
comes largely responsible for the success of the institution. 

Qualities of a Credit Man 

The individual who presides over this department must 
have certain qualities that are essential. First, he must have 
due regard for system, for the information must be so ar- 
ranged as to be quickly obtainable and complete when it is 
wanted. He must have a broad knowledge of business 
methods and practices. He must know the terms of business 
and the state of business. He must know trade secrets — 
not to give them away, but to use. He must be somewhat of 
an accountant, for unless he has the analytic mind that ac- 
countancy develops, he cannot make proper deductions. He 
must know how books are kept and how to keep books. He 
must be a surgeon — able to dissect, and a plrysician — able to 
prescribe. 

He must have the "credit sense" — the detective's instinct, 
to quickly perceive a clue that may begin with a button and 
end in a conviction. He must know something of law — the 
law of collections, of negotiable instruments, of bankruptcy. 
Like a good trial attorney, all that he may know will come 
into play sometime and somewhere. His work is not like 
much of the work in a bank, a daily grind; for while each 
day has its duties, and each day its problems, to-day will 
not be a yesterday, nor will to-morrow be another to-day. 

The Credit Man's Tools 

The tools with which a credit man works have become 
quite as much standardized as the carpenter's saw and ham- 
mer. First, of course, his brains. While every workman 
needs a proper proportion of gray matter, the credit man 
needs a generous supply, for in many instances he will have 
no one to tell him what to do. And the gray matter should 



488 THE PRACTICAL WORK OF A BANK 

be well polished by study and well nourished by exercise. 
He can acquire much of the needful in his calling by tutor- 
ing under the slow but thorough schoolmaster, experience. 

The deductive ability of the credit man will be used in 
various ways, but principally in analyzing men and figures. 
Here he can "use his head" to advantage. He must know 
men. He must know human nature. He must know that 
certain classes of men are good or poor risks, and why. He 
must know what men, as a class, do under certain conditions. 
He must be a good mixer and a good artist at painting 
mental pictures. He must be a good tailor and able to take 
correct measures. It would seem that the collar and the tie, 
the jewelry and the clothes, have nothing to do with credit; 
yet the credit man will tell you it does. The man careful 
and tasty about his dress will be likely to be careful about 
other things. He who is reckless in spending money for 
pleasure may be reckless in spending money in business. Big 
traits manifest themselves in little things. 

The next in the list of tools are the recognized agency re- 
ports. Not that they are more important than other tools, 
but they are the foundation for much of the credit work. 
These agencies are so well established and cover the field so 
thoroughly, that they are used everywhere by banks and 
business houses as commonly as the fountain pen. The two 
leading agencies classify and rate practically every business 
house in the country, and, supplemented by the agencies that 
report on the more personal side of individuals, they afford 
the beginning of every credit investigation. To the pub- 
lished ratings are added special reports, that go into minute 
details regarding the person, his habits, his record, and other 
information concerning the moral and financial standing of 
the applicant. 

Supplementing this still further are the reports of banks, 
and firms in the trade, which have intimate knowledge of the 
party, experiences in lending money and dealing in general 
with him, and can state with authority the habits of pay. 

Next come the published reports of mortgages, judg- 
ments, bankruptcies and failures, assignments, etc., which 
are all important as danger signals. 

Then there are those underground channels of informa- 
tion, gossip, bits of information gathered from various 
sour©es 5 all bearing upon the credit risk. 



ESSENTIALS IN GRANTING CREDIT 



489 



Lastly and by no means the least important, is the state- 
ment of condition, which, unless made by an independent 
audit, has well been termed "the borrower's estimate of him- 
self." This may be the beginning from which all other 
sources of information radiate, or the focal point to which 




FOUR-DRAWER STEEL CREDIT FILE 



they all gather. But whether the beginning or the end of 
the inquiry, the statement is the one factor that is coming to 
be given its proper place in the credit scheme. All the above 
finds lodgment in the credit department files as tools for the 
credit man's work. 



490 THE PRACTICAL WORK OF A BANK 

Whether the credit department is a finely organized part 
of the bank, with its chief, its clerks and its files, or one of 
the many nooks in the brain of a busy bank official, the pur- 
pose of the credit department is twofold; (a) to assemble in- 
formation, and (b) to use it. 

The Deductive Process 

The first deduction which the credit man will insist upon 
being satisfactorily established is that the applicant is honest. 
This may seem a trifle threadbare; but it is a truth that is 
admitted by all who understand credit science, and is recog- 
nized as an essential, if not the essential element. This hon- 
esty does not necessarily mean that the applicant shall have 
all the Puritanistic virtues of the ethical code of long ago, go 
to church and say long prayers — for some credit men prefer 
that he should have his religion on the inside and not as an 
adornment. But he must be a man of strict integrity, as 
integrity goes in business, deal fairly, and, to quote the great 
commentator Blackstone, "live honestly, harm nobody and 
render every man his due." He must give full measure, do 
no tricky thing, fail only because there is no other way, and 
have that reputation as a business man which stamps him 
worthy of his citizenship. 

In the second place he must be able as well as honorable ; 
he must be a man who can. Thirty per cent, of business fail- 
ures are due to lack of ability. The art of management is a 
fine one and all cannot acquire it. Business cannot run it- 
self; there must be the "know how" behind it; and this know 
how cannot be learned at the bank's expense. It must 
preferably be learned in the school of experience as an un- 
derling, else as a superior he may lose his own capital and 
that of others while acquiring the ability to administer. 

Thirdly, there must be the assurance of adequate capital, 
for thirty per cent, of the business failures are due to lack 
of capital, this cause contributing as many failures as lack of 
ability. How much that capital should be is a credit deduc- 
tion to be determined from the facts. It must be enough. 
Business can run on credit for a time, and in a limited way, 
but there must be the backbone of invested capital to sup- 
port the credit structure, or it will collapse under strain. 
Capital is like the underpinning of a building — it gives 
support to the structure while the work is being carried on. 



ESSENTIALS IN GRANTING CREDIT 191 

Credit makes a beautiful structure ; but it needs the stability 
of capital to insure lasting qualities. And every business 
must of necessity have its adequate capital investment or it 
fails. 

"The Three C's of Credit" 

For the present purposes we will assume that the 
three C's of credit — Character, Capacity and Capital — are 
in evidence in each of the problems under review. In 
just what proportion is not essential for the time being, it 
being enough that they exist in a measure sufficient to pass 
the test. 

How this is ascertained depends upon the loan, whether 
local or foreign. If the applicant is a depositor, we will 
have his average card to judge the quality of his bank ac- 
count ; he may be known personally ; we may get a report on 
him; we may inquire among the business houses where he 
trades. If the borrower is not known, as most of the bor- 
rowers in the open market are not, we ascertain the moral 
standing by communicating with the banks and trade con- 
nections given as references. But being satisfied on the es- 
sential points suggested above, the proposition gets down to 
an analysis of the statement, in order to ascertain the prob- 
ability of the loan being paid from the property worth, ir- 
respective of its moral setting; for ultimately the loan must 
be paid from the earnings and assets of the business. If there 
be honesty and ability but no resources, the former qualities, 
however much in evidence, will make a poor paymaster. 
From the business as a business, buying and selling, trading 
and taking trading profits, the loan must be paid, and it is 
now to inquire if, in the probabilities of business, the appli- 
cant will, in the course of time, be able to make good on his 
promise. This is the purpose of the statement. 

We shall, therefore, take four representative statements 
— actual statements, in different lines of business: (a) 
Meats, because of the liquidity of the assets and their quick 
convertibility; (b) groceries, because of their wide demand, 
and likewise quick convertibility; (c) millinery, because of 
its seasonable character and risky qualities; (d) a manufac- 
turer of brass beds, to illustrate points found only in manu- 
facturing statements. By dissecting these statements we 
shall unconsciously apply many credit principles, and not 



492 THE PRACTICAL WORK OF A BANK 

only endeavor to arrive at proper conclusions, but under- 
stand the logic by which they are obtained. For every de- 
duction there is a reason, the reason being better understood 
by applying a principle than merely talking about it. 

Essentials in a Credit Statement 

Forming as it does the foundation of the credit man's 
deductions, two things are essential in a statement: (a) That 
the statement be an authentic summary of the borrower's 
financial condition. It should be accompanied by a profit 
and loss statement to show the progress of the business as 
the statement shows its position. This statement should 
preferably be made by an independent auditor whose sole 
purpose is reliability and conservatism ; for if made by the 
borrower or under his direction it is not only apt to be biased 
in his favor, but overstate the assets and understate the 
liabilities, human nature being prone to make allowances for 
itself. If it is certified by a recognized firm of public ac- 
countants, so much the better ; if not, all that the credit man 
may know concerning the integrity of the would-be borrower 
will be opportune. 

It has been well said that it is not the crooked borrower 
who is most to be feared but the deceived borrower — the one 
who is himself misinformed as to his condition, and who 
passes the deception on to his bank. A crooked borrower 
may be a good window dresser, but a deceived borrower is a 
false window dresser. He mistakes wax figures for human 
beings, and papier mache for oak. He does not know the 
real from the false, (b) The statement must be of recent 
date — six months should be the limit, for much can happen 
in a few months, and semi-yearly statements are none too 
frequent. In the analysis of a credit statement the first 
things to be noticed are: 

(1) The line — whether staple or seasonal; a novelty or 
a necessity. Obviously the broader the market, the more 
steady the demand; and the nearer it approaches the abso- 
lute necessities of life the better. We can get along with 
last year's bonnet, but we cannot live on last year's bread. 

If the application is from an out-of-town borrower — 
commercial paper, it should not be in the same line as the 
loans that predominate in the home trade. Thus, a bank 
loaning largely on lumber should not buy lumber paper; 



ESSENTIALS IN GRANTING CREDIT 493 

and the one that loans on cotton should not buy cotton 
paper. Scatter the eggs rather than scramble them. A 
bank like an individual thrives best under a varied diet. 

(2) The ratio of quick assets to quick liabilities — it is 
apparent that maturing debts can be met only by maturing 
credits. The assets must turn into money to meet the ma- 
turing obligations, and unless there is a sufficiency of assets, 
they may shrink before realization to the danger point. 
Book accounts are never worth their face. The shrinkage 
depends upon the character of the business, the care used in 
the credit department, the efficiency of the collecting system 
and the state of trade; but there must be a margin for 
safety. 

Credit men differ as to the proper proportion of quick 
assets to quick liabilities, but the ratio should run from one 
and one-half to three to one, depending upon the nature of 
the business. A quick asset like meat will require less mar- 
gin than a slow asset like a stock of rare drugs. This ratio 
Is quickly determined, the standard statement giving the 
quick assets and quick liabilities segregated, so that com- 
parison is quickly made. This being satisfactory, we are 
prepared to make other deductions looking to the desirabil- 
ity or undesirability of the extension of credit. We will 
take, first, the statement of a wholesale meat concern. 

STATEMENT No. 1. 

The Packing Company. 
November 1, 1914. 

ASSETS. 

Cash $164,000 

Accounts receivable 242,000 

Merchandise 423,000 

$829,000 



Plant 373,000 



$1,202,000 



LIABILITIES. 

Bills payable $391,000 

Accounts payable 41,000 432,000 



Net worth $770,000 

'Capital $5,000,000 

Surplus 271,000 

Sales 7,500,000 

Ratio of quick assets to quick liabilities: about 2 to 1. 



494 THE PRACTICAL WORK OF A BANK 

Comment on Statement No. 1 

First, we note the class of business — meats. These obvi- 
ously are in constant demand, have no seasons, can be turned 
into money in a few days at the longest, and are steady in 
price and the value certain. Meat, like wheat, is as good as 
gold. 

Next the date — recent. Good. But it is uncertified. 
The firm, however, bears a good reputation among the trade, 
are well regarded by ther own banks, and the reports are all 
favorable. (Information obtained from the credit files, 
through correspondence with the banks where they keep ac- 
count and among the wholesale meat trade.) 

Ratio of quick assets to quick liabilities, about two to one. 
It is considered in the meat trade that one and a half to one 
is sufficient for reasons above noted; and this firm quali- 
fies with a margin considerably over the standard set by 
credit men. 

Cash, $164,000. We find that by dividing the annual 
sales by 300 (the number of working days in a year) that 
they sell about $25,000 a day. Inasmuch as they sell for 
cash, they should buy for cash and must have an ample bal- 
ance. The cash on hand amounts to six days' purchases and 
owing to the short term of credit this is sufficient. There- 
fore, the cash balance while seemingly large is not too large 
for a cash business. The firm has no bills receivable. Ac- 
counts receivable are, next to bills receivable, the quick assets 
of a firm. They represent merchandise gone out of stock. 
They are merchandise turning into cash. The volume of ac- 
counts receivable indicates the credit operations of the firm. 
If the terms of credit are thirty days, they should not, at the 
most, have more than one-sixth of the total sales on their 
books, and this would be extending the period of credit 
unduly. 

In this case we assume that the credit terms are not over 
ten days ; cash at the end of the week, most likely, and there 
is, therefore, about ten days' sales on their books, a normal 
amount. 

Merchandise in this case represents meats and other food 
products that are essentially as good as cash. This does not 
always obtain in merchandise accounts as will be noted sub- 
sequently; but in this instance we pass the merchandise item 



ESSENTIALS IN GRANTING CREDIT 495 

with but a single deduction, i. e., that they have about two 
weeks' supply on hand. The plant, while it may be valuable 
for its terminal or water-front location, is worth the ground 
value onfy, the buildings being little suited for anything else, 
We discard it entirely. 

Bills payable, $391,000; accounts payable, $41,000, or 
less than two days' sales. The firm evidently borrows in the 
open market on its single-name paper and with the proceeds 
buys cattle for cash, and the statement so indicates. They 
have borrowed about one-half their net worth, and from 
every standpoint this statement presents a healthy condition. 

They do not and should not have many accounts payable 
on their books. They borrow to pay cash and this firm no 
doubt does, the $41,000 representing accounts in process of 
audit. 

Capital, $5,000,000. Whatever this is, in the present 
case it means nothing, for the net worth is $770,000 and they 
do not show assets to balance the statement if capital be in- 
cluded. You may loan them or buy their paper with assur- 
ance that it is good. 

The surplus in any corporate statement simply repre- 
sents the difference between assets and liabilities at the values 
stated. It is not a cash surplus unless the assets realize their 
listed value, being merely an adjustment to make the state- 
ment balance; and the surplus might be eliminated through 
a shrinkage in merchandise valuation. Reversely, it might 
be created by an overvaluation of merchandise. But in a 
packer's statement it would be nearly a cash surplus, al- 
though in this case it might be represented in part by the 
overvaluation of plant. 

STATEMENT No. 2. 

Brown $ Jones, Wholesale Grocers. 
October 1, 1914. 

ASSETS. 

Cash $410,000 

Accounts receivable 1,021,000 

Merchandise 1,301,000 

$2,732,000 

Real estate $297,000 

Machinery and fixtures 62,000 

Good will 2,000,000 2,359,000 

$5,091,000 



496 THE PRACTICAL WORK OF A BANK 

LIABILITIES. 

Bills payable $930,000 

Accounts payable 61,000 

Dividends payable 45,000 

— 1,036,000 

Capital $3,500,000 

Surplus 555,000 4,055,000 

Net worth (eliminating good will) $2,055,000 $5,091,000 

Ratio of quick assets, 2.6 

Sales, $10,360,000. 

Profits, $252,000. 

Dividends, $190,000. 

Certified to by the Accountancy Co., as per their audit, October 10, 1914. 



Comment on Statement No. 2 



First, the class of trade — food stuffs, in constant de* 
mand, profits small but sure, terms reasonably short, and 
the merchandise quickly turnable into money. Not so quick- 
ly, however, as meat, but within a short period. Therefore, 
the goods are essentially money, if well selected and staple, 
rare articles being handled only on order. 

We note that the statement is certified; therefore, it is 
from an independent source. The auditing firm i s wel l 
known for its knowledge of the grocery business, and gives 
particular attention to inventory. We, therefore, accept it 
with confidence. 

The ratio of assets to quick liabilities is 2.6 — a goodly 
ratio in this business and, therefore, we start off well. Two 
to one would be ample. Cash, $410,000, enough to pay 
nearly half the bills payable, or six times the accounts pay- 
able. 

We find the sales to be $10,360,000, or about $850,000 a 
month. The accounts receivable are equal to about five 
weeks' sales and this shows that they are close in their credits 
and collect promptly. The terms in the grocery trade are 
not over thirty days, cash in most instances and a week's 
credit in others. The merchandise is equal to about six 
weeks' sales and this is .• mother good omen. They are turn- 
ing over the stock frequently. 

Against total quick assets of $2,732,000 they owe only 



ESSENTIALS IN GRANTING CREDIT 497 

$1,036,000. Their liabilities are in the main for money bor- 
rowed on their notes — probably single-name paper sold 
through brokers. Their accounts payable amount to but 
$61,000. This is as it should be. They borrow — or ought 
to — in order to take trade discounts. The statement indi- 
cates that to be the case. It could be certified by communi- 
cating with the trade. They should not have accounts pay- 
able in large volume on their books. These are doubtless in 
process of payment, and may be eliminated from the debts. 
The dividend is probably accrued to the time of the state- 
ment and is properly listed as a liability, although not neces- 
sarily quick. 

The capital and surplus represent the net worth — over 
four million (two million, eliminating the good will), and 
their debts are but one-quarter of the net worth. 

As to slow assets and supporting the quick, we have real 
estate of $297,000. This is probably in the wholesale dis- 
trict, well located for business purposes and if properly 
scaled or conservatively appraised, is allowable at that 
figure. 

Machinery and fixtures, $62,000, may well be eliminated; 
for such is special machinery, and would be scrapped in case 
of liquidation. But it is not a large item, and may be disre- 
garded. 

Good will, $2,000,000. Good will has been defined as 
"the tendency of trade to follow established fines." It may 
be that this firm has valuable trade-marks, brands of canned 
goods, coffees; or has taken over such from other concerns, 
issuing stock therefor, and it depends altogether upon what 
this good will account represents whether it is inflated or 
not. The good will of Ivory soap, Uneeda biscuit, and 
other widely advertised articles is enormous and may well be 
capitalized. This good will may be in the same class. 

The firm has earned about seven per cent, on the capital; 
paid dividends of about five and one-half per cent, and 
added $62,000 to its surplus during the year. 

But aside from all other considerations, we have over 
three millions of good assets and debts of only a million, 
and, therefore, this firm has borne the acid test and is good. 
Buy their paper without hesitation. 

33 



498 THE PRACTICAL WORK OF A BANK 

STATEMENT No. 3. 

Doe $ Co., Wholesale Millfoiers. 
July 1, 1914. 

ASSETS. 

Cash $56,000 

Bills receivable 15,000 

Accounts receivable 209,000 

Merchandise • • • 204,000 



$484,000 



Machinery 3,000 

Advances 40,000 

Other assets 90,000 133,000 



$617,000 



LIABILITIES. 



Bills payable $75,000 

Accounts payable 9,100 

Deposit of money 1,000 

Commissions 17,000 

Loan 50,000 152,100 



Net worth $464,900 

Ratio of quick assets to quick liabilities, 3.18. 
Sales, $2,489,000. 

! 

Comment on Statement No. 3 

I have next selected a millinery statement because of its 
highly fashionable atmosphere, its seasonal buying, and the 
deductions that it invites. Here we find a ratio of 3.18 — a 
goodly proportion — and well we might. I do not know the 
exact terms in millinery, but such goods are bought for two 
seasons, the spring and fall. The popularity of a certain 
style may suddenly change, if some Parisian model appears 
at the races with a new creation that will set all the world 
of fashion agog, and place millinery houses on the anxious 
seat, wondering if their advance orders will be cancelled and 
a season's work in a large measure discounted. 

Such goods are sold to large and small dealers all over 
the country, and the terms of credit cannot be rigid, depend- 
ing upon the weather in a large measure. 

While the profits in retail millinery are large, they must 
necessarily be so, for the busy season must pay for the dull. 
How risky is a stock of millinery may easily be understood. 
If the fashions change, or the women do not take to the 
styles of the house, or the buying has been without good 
taste, the stock may be unsalable at any price. 



ESSENTIALS IN GRANTING CREDIT 499 

We note that the statement is as of July 1st, when the 
buying season is over, and the statement should, therefore, 
show merchandise reduced, accounts receivable large, but 
maturing rapidly, the cash running up and the debts run- 
ning down. We should have a statement at the height of 
the season and one at the ebb, to determine the true condi- 
tion at the present time. At the beginning of the season 
the stock will be large, cash reduced, accounts receivable 
cleaning up, bills and accounts payable large, or just the 
reverse of the condition at the end of the season. 

Here we find that there is no comparative statement, and 
so we do the best we can with the one in hand. 

Sales were about $2,500,000. This cannot be spread 
over months, for they are as aforesaid, seasonal. Allowing 
four months of slack seasons, we have eight months of ac- 
tivity, and the sales would then average $300,000 a month. 
The merchandise is less than a month's sales, and has prob~ 
ably been cleaned up pretty well and the profits taken. The 
accounts receivable are not large in comparison with sales, 
about one-twelfth. Bills receivable are not large and should 
not be, such goods being sold on book account and not on 
notes of hand. If larger these might be investigated to as- 
certain if they are for old accounts. They might be for 
borrowed money. Inasmuch as the merchandise is last sea- 
son's stock, we eliminate it largely and cut it down at least 
one-half. 

No careful credit man will loan on a statement showing 
assets largely in merchandise. It is not goods on the shelves 
that pays debts, but goods sold to good customers represent- 
ed by book accounts ; and while the stock should be ample, it 
should not predominate, with little cash or accounts receiv- 
able. How quickly merchandise can be turned into money 
depends entirely upon the goods. Groceries can be turned 
into cash in a very short period ; a stock of trimmings for my 
lady's dress in a time that is doubtful. Salable goods — that 
is the crucial point. It is said that the United Cigar Stores 
keep only a few boxes of each brand of cigars at each store. 
But they keep ordering as fast as the stock goes down, and 
the sales sheet of one day is the order sheet for the next. 
They know how to turn stock. This is a business asset. 

Reducing the stock by half, we then have net quick as- 
sets of $384,000, and allow $50,000 for shrinkage in collec- 



500 THE PRACTICAL WORK OF A BANK 

tions. Against this we have bills and accounts payable of 
$84,000, commissions of $17,000 probably due salesmen and, 
therefore, quick liabilities, and a loan of $50,000. This 
should also be investigated to see to whom it is due, and 
when. There is also the deposit of $1,000 from employees, 
probably, and if larger this would be an element to consid- 
er, but even so, for debts of $152,000 we have twice that 
amount in liquid assets and this makes a good statement. 
But the character of the goods makes care necessary, and 
the point to be emphasized is the season. This stock may be 
wholly unsalable next season, and if so, it is a dead loss. A 
ratio of three to one is not, therefore, unduly large for 
safety's sake. 

STATEMENT No. 4. 

The Brass Bed Company. 

February 1, 1914. 

ASSETS. 

Cash $411,000 

Bills receivable 271,000 

Accounts receivable 712,000 

Merchandise 1,547,000 

— ■ $2,941,000 

Real estate $1,254,000 

Machinery and fixtures 1,072,000 

Investments 134,000 

Patents 1,376,000 

Other assets 88,000 3,924,000 

$6,865,000 
LIABILITIES. 

Bills payable $1,187,000 

Accounts payable 36,000 

$1,223,000 

Capital $4,000,000 

Reserve 252,000 

Surplus and profits 1,390,000 5,642,000 

$6,865,000 
Ratio quick assets to quick liabilities, 2.4. 
Net worth, $4,266,000. 
Sales, $6,150,000. 
Profits, $550,000. 
Dividends, $306,000. 

; 

Comment on Statement No. 4 

We note first that the firm has taken considerable in notes 
from its customers. If it issues paper on the market, these 
should be in its possession, for two kinds of paper (single- 



ESSENTIALS IN GRANTING CREDIT 501 

name and receivables) should not be on the market at the 
same time. It evidently sells both on book account and 
note; but the bills receivable should be investigated to as- 
certain if they are good, if given for old accounts or re- 
newed. A statement might be asked for giving the maturity 
of these, classified into thirty, sixty and ninety days, and 
whether for old or new invoices. 

While bills receivable are notes received by the firm in 
payment of bills, it depends altogether upon the nature of 
the business whether they should be in evidence. In a de- 
partment store selling for cash or on charge account, we 
should find but few, if any, of these items, for if so they have 
been taken for accounts hopeless of collection by the regular 
methods. If the concern were a lumber company, an agri- 
cultural machinery company, which sell largely on these in- 
struments, we may expect to find them in large volume and 
properly so; but not in a cash or semi-cash concern. 

For instance, in raw silk the terms are six months' note, 
and we may expect to find receivables in quantities, and it 
becomes needful for the credit man, as aforesaid, to know 
the terms of business in order to pass upon these items in- 
telligently. 

Receivables should never be for loaned money; for why 
should a firm lend and borrow at the same time ? They may 
be given by the partners, or interested parties, and if so they 
are doubtful ; at any rate, they are not a good asset. 

The accounts receivable are about one-ninth of the sales, 
and the two items — bills receivable and accounts receivable — ■ 
represent about two months' sales, showing that these items 
are not unduly large, the terms in furniture being upwards 
of two months. 

Merchandise, $1,547,000. This will also admit of test. 
Is it raw material, or manufactured articles, or both? When 
was it inventoried? By whom? This is a large item, and 
amounts to one-quarter of a year's sales. It is probably 
brass or iron tubing, metals of other kinds, and, therefore, 
has a value as raw material in itself. But merchandise being 
so uncertain in its valuation, such a large item would bear in- 
vestigation before placing much faith in it. 

We then have real estate — the plant, of one and a quar- 
ter millions. This doubtless is valuable for its location, but 
should have been appraised by an independent appraiser and 



502 THE PRACTICAL WORK OF A BANK 

properly scaled down to at least its market value, irrespec- 
tive of its value as a factory for a particular purpose. Credit 
men do not lay much stress upon real estate, and especially 
factories. 

Machinery and fixtures, $1,072,000 — another large item. 
This is special machinery and has little value except for its 
particular purpose. We, therefore, discard it entirely from 
our calculations. Patents, $1,376,000. These may be very 
valuable and may be properly capitalized. How long have 
they to run? Is there any litigation concerning them that 
may cost the firm heavily if adverse decisions are rendered? 

Investments and other assets, $232,000. These should 
be scheduled before accepting, to ascertain what they are, 
for they may be of doubtful value in the statement. Bonds 
of allied concerns and the like are questionable at times, but 
often valuable for the business they control. 

We note on the liability side that the firm has borrowed 
$1,187,000 presumably on its paper in the market. The ac- 
counts receivable are not large, $36,000, and it quite likely 
takes advantage of the cash discounts. It has cleaned up its 
bills as rapidly as could be expected. But eliminating all 
slow assets, we have quick assets of $2,941,000 to meet 
quick liabilities of $1,223,000, and it is in a healthy condi- 
tion, able to stand considerable strain, with ample cash on 
hand, and allowing all assets at their listed amount, a net 
worth of over five millions, or five to one of liabilities. 

Of course in the credit files there will be letters from 
banks which have accounts with these firms, letters from 
the trade connections, stating whether they take their dis- 
counts steadily or not, their general habits of pay, and the 
moral standing of the members of the various firms, their 
living habits and general reputation in the community. 

The above is only a partial review of the credit man's 
mental processes as he glances over a statement; but I have 
in a small measure endeavored to indicate his train of 
thought as he passes judgment on a request for a loan. 



CHAPTER XIV. 

THE BANK MAN IN THE MAKING 

If the average bank man were asked why he chose bank- 
ing as a career, he would doubtless confess that he didn't 
choose it, but just drifted in. This desire to work in a bank, 
so frequently found in young men, is easily accounted for, 
for there is an attraction in banking which seems to appeal 
to young men, and the impression is quite rampant, errone- 
ous though it may be, that the hours are short, the pay good, 
and the work easy. 

He may have done as one young man did, look into the 
fine banking room and becoming impressed with the gran- 
deur of the marble and the bronze, decided that it was "good 
enough for him," and got a job therein. Or, he may have 
seen the sign on the doors: "Open from 10 to 3 — Saturdays 
until 12," and become impressed with the shortness of the 
hours, as another did, and chose his calling accordingly. 

The Banker in Fiction 

The banker is pictured in fiction as a tall, slim, dignified, 
gracious individual, with gray hair and a beard, given to 
patting children on the head, and doling out pennies or dis- 
pensing advice in matters personal, religious or political 
with equal ease — a leading citizen, if you please, with a halo 
about his head and a fat wallet in his pocket. And, making 
up his mind that he, too, would like to raise a beard, wear a 
halo, dispense pennies and free advice, and carry a fat wal- 
let, many a youth has, undoubtedly, sought this profession 
as affording all these luxuries ; but whether his dream comes 
true or not depends largely upon the man. 

The Bank Man's Wage 

No doubt banking offers exceptional opportunities for 
making money. The banker's name stands for something; 
his support lends weight to an enterprise. Therefore, he is 
let in on a great many projects and by virtue of his finan- 

503 



504 THE PRACTICAL WORK OF A BANK 

cial training becomes a good judge of investments and is 
able to distinguish between good risks and bad. He some- 
times fails to distinguish between the two, speculates with 
his own and the bank's funds and the old story follows. But 
the man who enters banking "for the money that's in it" will 
either fail to realize his ambition or miss the chief charm of 
the profession; for success here cannot be measured by the 
dollar standard. 

Banking is a dignified calling and worthy of any man. 
It is a field of exceeding usefulness ; and the banker imbued 
with high motives and a kindly heart can do much good in a 
quiet, unostentatious way. 

Banking is not a bed of roses, and the banking world is 
full of disappointed and dissatisfied men. There are, 
perhaps, more disgruntled men than contented. The officers 
seem to have such an easy time. They receive callers ; write 
letters ; attend meetings ; examine statements : draw fat sala- 
ries; attend conventions; play golf. And all would, there- 
fore, be officers. But many a grumbling clerk forgets that 
some men are paid, not for doing things, but for knowing 
how. Even the gentle art of saying, "How do you do!" is 
an asset to their bank, and likewise the gentler art of saying 
"no"; and not all men are artists at shaking hands and 
saying "no." 

The average messenger in a large bank receives, as a be- 
ginner, about $25 per month. From this he will be advanced 
as he progresses until he receives about $1,000 a year (or 
less) to run a ledger. Tellers in New York receive from 
$1,800 to $4,000, depending npon the bank, the length of 
service, the size and spirit of the institution. Twenty-five 
hundred would, perhaps, be a fair average. In country 
towns ten to twelve hundred dollars is a good salary for 
tellers and bookkeepers, and from two to three thousand is 
considered good pay for officials. The president frequently 
gets nothing but honor ; but in large places he is the highest 
paid official, and will receive from five to twenty-five thou- 
sand, a few in very large banks passing this figure, but the 
number is small. 

Two Schools of Banking 

Bankers may be divided into two schools, those who be- 
lieve experience is the great (and only) teacher, and those 



THE BANK MAN IN THE MAKING 505 

who believe in a combination of experience and book learn- 
ing. The former must go through an experience before they 
can profit by it; must have law suits in order to learn the 
law, and losses in order to learn how to invest. They will 
point with pride to the fact that they never had a loss and 
turn around and make a wrongful payment that a little 
book knowledge would have prevented. They will rule on 
legal questions according to a decision discarded by the 
courts years ago. They will cite law that is not law because 
it is bad, and law is never bad — although legislation may be. 
They must burn their fingers to prove that fire is hot. They 
do things a certain (foolish) way for no better reason than 
that they have always done them that way, and become old 
in the service before they learn that book's are men's experi- 
ences, and through the experience of others we can avoid 
the pitfalls ourselves. 

The other school says: "Give us books. Tell us what 
other men have done and gotten into trouble, that we may 
be on guard against the same things. History repeats itself. 
What happened in one bank may happen in another: there- 
fore, show us the law — not that we would be lawyers — but 
just good bankers, and, therefore, keep out of court. Teach 
us economics that we may understand the trend of events 
and discern the signs of the times; grammar that we may 
write good letters ; credits that we may make safe loans ; the 
theory of money that we may understand currency problems, 
and history, that we may judge the present in the light of 
the past." 

And you do well if you decide to take up this calling, to 
join the latter school, for these are the men whose future is 
before and not behind them — the optimists who know how 
to say "good morning!" 

Of necessity the beginner will, as a rule, have to start 
at the bottom. Let experience go hand in hand with study. 
You will better understand what you read about if you are 
doing the very things, than if you attempt to get the theory 
without the practice. And if you get into a good bank, 
work hard, keep your eyes and ears open; spend your spare 
time along definite, constructive lines; it may be that you 
will get to the top, for the top is never crowded. 

If the question were, therefore, put: Shall I go into 
banking? The answer would be: That depends upon you 



506 THE PRACTICAL WORK OF A BANK 

and the bank ; first, you and then the bank. If you have not 
the banking instinct and temperament — a liking for the 
things the banker must know and do, then the best training 
school in the land cannot make you a banker, but simply a 
bank clerk; and if the bank has not the environment and the 
opportunities that make a banker, a good man will not 
linger long after he discovers it. 

Country Bank or City Bank? 

The question arises whether a country bank is a better 
training school than a city bank. It depends. If the coun- 
try bank is a well-managed bank, broad in its views, liberal 
in its outlook, progressive in its management, not hidebound 
by tradition and a slave to the laws of the Medes and Per- 
sians, and the clerk is allowed the freedom of the place and 
permitted to learn the workings of the whole bank, he, no 
doubt, will acquire a better knowledge of banking, as a 
whole, than if he were to go into a highly departmentized 
bank and work from one department to another, acquiring 
only part information at a time. On the other hand, he will 
get a broader outlook in the city bank, and cosmopolitan 
advantages that smaller places do not afford. Let him, 
above all things, unite with the American Institute of Bank- 
ing and take its study courses, a very excellent training in 
the theory and practice of banking. 

Whether he becomes merely a machine or not, and 
whether he succeeds or not, depends as much upon the man 
as upon the bank; but if success comes it will be a combina- 
tion of both ; and if he fails it may be the fault of both. And 
failure is a relative term. Some failures are successes, after 
all. I would rather be a Philip in the First National Bank 
of Boston than certain dead men who once were bank pres- 
idents. 

Proper Training Essential to Success 

The ultimate success that the bank clerk attains will, in 
a very large measure, be governed by the training school in 
which he works. If he makes a failure, it may be because he 
did not have the discipline and the coaching that he should 
have had in early days. If a young man in the bank is do- 
ing things he should not do, in or out of the bank, the proper 



THE BANK MAN IN THE MAKING 507 

course is not to discharge him, but to take him in hand and 
show him the error of his way, and correct him. If he will 
not learn, then severer measures may be necessary. As a 
boy he will not see things in the light of the man, but the 
man can see things in the light of the boy; and every banker 
owes it to himself, as a trainer of men, and as a man who 
should be interested in boys, to give them proper encourage- 
ment. 

If he is frittering his time away after bank hours, a 
course of study may be suggested. If he shows an apti- 
tude for any one branch of banking, give him a chance. A 
boy with an overwhelming ambition to know and to do needs 
right direction, or he will be likely to scatter his energies. 
The banker owes it to himself and to his men to find out the 
things that interest them; to encourage them in the right, 
and advise them if in the wrong. If a man shows an inclina- 
tion to study, see that he studies the right things — the things 
the banker should know. Make it easy for him to get in- 
formation. Subscribe to the financial papers. Put them 
where the bank men can get them. Do as one bank in New 
York does, subscribe for the best magazines in sufficient 
quantities so that all may read who care to, and be sure to 
read them yourself. 

Pivotal Points in the Bank Man's Life 

But whatever the motive that induced our man to become 
a bank clerk, his banking career will, if he is successful, di- 
vide itself into three periods or epochs: the period of observa- 
tion; the period of application, and the period of adminis- 
tration. Just where one begins and the other ends is not 
easy to say. He can make these periods long or short as he 
will ; and whether or not his career shall end in the period of 
close application where every to-day is a yesterday and every 
to-morrow will be another to-day, is for him to determine. 

Little things often turn the current of life's events for 
better or for worse, and no man can tell when an event, in- 
significant in itself, may make or mar his future. Therefore, 
let us not despise the little things, for, as Michael Angelo 
observed, "trifles make perfection, and perfection is no 
trifle." And so, let every day be the great day, and every 
chance the great chance, for if the task be worthy, it de- 



508 THE PRACTICAL WORK OF A BANK 

serves our very best, and good work well done, like the 
chickens, surely comes home to roost. 

Learning by Doing 

The period of observation begins as he enters the bank 
as a runner. Here he will learn to do by doing. If he is a 
good messenger, he will have no other ambition than to do 
his daily work well, and whatever banking knowledge he ac- 
quires, will not be from books, but from practice. He will 
not even know the reason why he does some things — it is not 
essential that he should; he will do as he is told, simply be- 
cause obedience is the order of the day. But as he works his 
way up through one department after another, he will ac- 
quire the practical end of banking, as a sponge absorbs 
water, without effort, and in due course will come into the 
period of close application where the mill grinds swiftly and 
often exceedingly fine. 

As bookkeeper, teller, loan clerk, or what not — occupa- 
tions requiring concentrated attention — his time will be fully 
occupied with detail work, monotonous in its grind, and 
often severe in its demands upon his strength, and it is in this 
period that he often longs for the more enjoyable experi- 
ences of banking on the "sunny side of the street." And if 
in the period of observation he is keen and alert, and in the 
period of close application faithful and accurate, the time 
will come when there will open to him the period of adminis- 
tration — the goal of every ambitious bank man. 

Every Man Can Better Himself 

We err greatly in holding out to Young America the 
hope that any boy can be President of the United States; 
for as a matter of history, less than thirty have ever achieved 
this honor, and less than thirty will during the present cen- 
tury ; for while it is not an. impossible goal, it is an improb- 
able achievement. But when we make the statement that 
every bank man can better his condition, improve his mental 
caliber, and increase his income, we state a fact which is 
borne out by current events in banking history every day. 
And when the banking world says to the men in the ranks, 
"You can climb, if you will; you need not stay in the period 



THE BANK MAN IN THE MAKING 509 

of observation very long, nor work in the grinding school of 
concentration always, but you can, if you will, lift yourself 
round by round into the happier experiences that attend the 
period of administration," it offers a proposition upon which 
it can make good. 

A Definite Aim 

To accomplish this desirable result, several factors must 
be taken into consideration. First of all, the man must have 
a definite aim, and worthy; for if it is not definite, his ener- 
gies will be scattered, and if it is not worthy, he cannot or 
ought not give it his best endeavor. Better to aim at the 
moon and hit a church steeple than to aim at a barn door and 
hit nothing. The human mind is ever open to distractions 
and is apt to follow the line of least resistance, and because 
it is so difficult to resist the tendency to mental wandering, 
a capacity for definite, constructive work is one of the great- 
est conquests a man can make over himself. 

Much of our reading is merely mental dissipation and 
what we need is to be able to concentrate our attention on 
one subject until it leaves a lasting impression upon the 
mind. It is better to know a few things well, very well, than 
to know a great many things casually, and, certainly, far 
better than to know a great many things that are not so. 

The unthinking man is not necessarily a dull man; he has 
probably occupied himself with unimportant thing's ; and un- 
til he gets a definite aim in life — a master passion as it were 
— he will never rise to his highest level of achievement, and 
if that passion is to know, he will either find a way or make 
one. 

Taking Himself for Granted 

The great temptation of the average man is to take him- 
self for granted; to get the idea that because he can do to- 
day's work as well as can be expected of him, at least so well 
that no criticism is hurled at him, and, therefore, he has done 
all that the occasion requires. Particularly is this true if he 
has had a small measure of success without unduly exerting 
himself. In this he greatly errs, for if he is a sensible fellow 
he will not be satisfied by the mere fact that he holds down 
a job — he should hold it up — giving it dignity and distinc- 



510 THE PRACTICAL WORK OF A BANK 

tion by the excellency of his work. And more than this, he 
ought to have his eye on the job ahead. Many a man owes 
his success to the fact that in an emergency he could step in 
and do the work of the man ahead, and many a man owes 
his defeat to the fact that when the opportunity was his, he 
could not rise to meet it. A great opportunity makes a man 
ridiculous unless he is prepared for it. The man whose hori- 
zon is bounded by the four walls of his cage, and who can- 
not see in the job ahead his opportunity will live to regret it. 
And if he cannot get in the departments higher up, let him 
get those departments in him. 

This taking one's self for granted is deceitful in the ex- 
treme, and such a one is apt to discover too late that he 
doesn't know what he thinks he knows; and many of the 
things he thinks he knows really aren't so. But he who 
would succeed in this war of brains must be willing to put 
himself to the test, taking nothing for granted, and demon- 
strate that he not only knows, but that he knows he knows 
what he knows, and what he knows is so. 

Many an energetic bank man, ambitious to rise in the 
world, grants you that "knowledge is power," and if success 
could be bought, would pay a goodly sum for it; but inas- 
much as knowledge is not a commodity measured by the 
dollar standard, the toll is often too great. Who has not 
seen the man who would not in a single hour like to learn 
some of the deep things of life, and willingly would he give 
the hour and the teacher's fee; but no educator can in an 
hour, a week, or a year, impart the information it has taken 
him a lifetime to acquire. And until our bank man is will- 
ing to pay the price in years he cannot hope for lasting re- 
sults. 

Definite Methods 

But the man with a definite aim must have a definite way 
of going at it, else the definiteness of the aim will be futile on 
account of the scattered energies. It is simply the case of 
the shotgun against the rifle; one scatters many shot — the 
other sends one bullet home. Many an ambitious bank man 
is willing to work for success, but needs direction as to how 
to make his willingness effective. Ambition often needs 
proper direction or the ambition is apt to turn into despair, 
and the purpose of banking education is to direct the man 



THE BANK MAN IN THE MAKING 511 

with a definite aim into the definite methods by which he can 
achieve a definite goal. 

What is Education? 

Education has been defined as a process by means of 
which experiences are acquired that will assist in rendering 
more efficient future actions; a course in discipline; a sys- 
tematic development and cultivation of the mind and other 
powers by examples, experiences and impressions ; or, as the 
German has it, erziehen, "to draw out." But whatever the 
definition, education must help a man think; to be orderly 
and logical in his thought processes ; accurate in his observa- 
tion of men and things; discriminating in his judgments and 
charitable in his conclusions. 

This process may be formal or informal. Informal edu- 
cation is the education that the bank man obtains through- 
out his business career without conscious effort to this end; 
experience, if you please. Such knowledge is absorbed with- 
out much thought or definite intent, In such a process a 
man is like a child, in that he gives matters passive attention 
and the activity is characterized by an interest in the process 
rather than in the finished product. He is absorbed in what 
he is doing for the time being and the end to be gained doea 
not unduly concern him. 

Experience a Dear Teacher 

No one will deny that experience is a good teacher. The 
lessons she teaches are long remembered; but the trouble is, 
she is a slow and expensive teacher and in such a school, one 
learns only those things with which he has come into contact, 
and profits not by the experiences of others. A burnt child 
dreads the fire much more than one who has simply read of 
fires in books ; but the trouble is the scar. And he who learns 
only in the school of bitter experience must expect to become 
scarred while learning. 

The great trouble with this form of education is that it 
is unsystematic. It fixes the experiences that happen to 
come, but makes no provision for the experiences that may 
come and are unfamiliar. And more, it is a time consumer 
and wasteful. Take a simple illustration. You burn your 



512 THE PRACTICAL WORK OF A BANK 

finger. Some one who has burned theirs and found sweet oil 
effective, promptly prescribes sweet oil; but this burn may 
not be a "sweet oil burn" and you call the doctor. He has 
not only had experience with burns of your kind, but with 
others as well ; moreover, he has studied burns in books. He 
draws not only upon his own experiences, but upon the ex- 
periences of others and immediately knows what treatment 
your burn needs. 

This is as true in banking as in medicine. The banker 
who relies upon his own experiences is helpless when his ex- 
perience has not covered that particular thing. He has not 
learned to reason; he cannot draw upon similar experiences 
of other men ; he has not trained himself to put facts togeth- 
er and draw conclusions ; to apply a rule to a set of facts and 
derive a correct solution. We would not belittle experience 
— it is most valuable ; but experience should be supplemented 
by study, and study by experience to make the all round 
bank man. 

Education a Definite Process 

Formal education is a graduated, definite process. It be- 
gins where it finds the man, gently leads him step by step 
into the higher realms of knowledge, adapts the process to 
the man and remembers his shortcomings. The great trou- 
ble with so many energetic bank men is, that not knowing 
where to begin they plunge blindly in, reading anything that 
bears on finance and banking; and this reading being non- 
constructive in its nature, accomplishes but little. It is high- 
ly essential that the student be well grounded in the funda- 
mentals before proceeding with the superstructure. This is 
the curse of ill-advised home study — it is unsystematic. The 
man starts wrong and ends wrong. And the great aim and 
purpose of education is to direct the man into those channels 
that will produce the best results at the least cost of time 
and effort. It leads him from the simple to the complex; 
from the concrete to the abstract ; supplementing theory with 
practice ; the law with the application thereof. 

More Bread and Butter 

Behind every scheme of education, whether it be a college 
course or a system of home training, there are two control- 



THE BANK MAN IN THE MAKING 513 

ling motives, both of which are worthy; first, the bread-and- 
butter motive, and, second, knowledge-for-its-own-sake mo- 
tive. It is just as much a function of the school to teach men 
how to earn a living as it is to teach them how to live; and 
just as essential to teach them how to live as it is to fit them 
to earn a living ; and the greater the knowledge, the greater 
the earning power, provided the knowledge be of the right 
sort. 

We live in the age of efficiency. The machinery of to- 
day is in the scrap-heap to-morrow. The old is supplanted 
by the new. Every machine must do its best, no lost motion 
— no idle time. We demand in every line of activity that the 
man be capable. We pay good money for ability, and get 
it, whatever the cost. He who can do things is well paid; 
he is well paid because he can do things. We do not always 
award the race to the swift, nor the battle to the strong; for 
behind the swiftness there must be sureness, and behind the 
strength, accuracy. Of what avail is a hard blow if it does 
not hit the mark? He who runs swiftly must be sure of his 
footing. He is the winner in the battle for bread who can do 
things and do them well. 

Carlyle reminds us that the German word "koenig" 
(king) comes from the verb cc konnen J (to be able) ; there- 
fore, a king is one who is able — a man who can ; and because 
banking continually demands kings — men who can — he who 
has his eye on the future must not ignore this call for effi- 
ciency, and is fully justified in his argument, that as he 
knows more he will get more; and when he knows more 
about one particular thing than anyone else, the world will 
rate him a specialist and pay him specialist's wages. 

The second motive for education is that we may know 
the truth, for the search for truth is the master passion of 
the human race. Not that we may merely hoard facts and 
figures, for such hoarding makes us misers as truly as the 
hoarding of money, but in storing up information there 
comes power in reserve. 

And in this storing process there are pleasures keen as 
the world affords. The enjoyments of the mind are as sure 
as those of the body, and the great truth is, the mental are 
the more enduring. Who will be so bold as to deny that the 
man who gets his amusement in a good book has not as gen- 
uine pleasure as he who must find his amusement in dissipa- 

34 



514 THE PRACTICAL WORK OF A BANK 

tion? It is a law of hygiene that he who would do his hest 
work to-morrow must not spend to-night in riotous living, 
and the prodigal loses at both ends. The story of the night 
is writ large in the work of the next day. It is admitted 
that to learn to appreciate knowledge for its own sake is 
not an easy task, but, nevertheless, it has its compensations. 
It does not demand its toll in strength, and in its possession 
there is in the present, satisfaction, and in the future, power. 
Therefore, let the bank man, while striving for more (or 
better) bread and butter, not forget that whiie he should be 
a specialist in banking, and, therefore, narrow, he may and 
should be broad as well; for back of keenness there must be 
breadth or the keenness becomes ineffective. And when 
knowledge for its own sake ceases to attract its devotees the 
human race will be in a bad way. 

The Bank Man's Twenty-Four Hours 

To the bank man who really wants to know there is no 
measure of time. The days are all too short and the nights 
too long for him who is in earnest about his education. Three 
o'clock — the "quitters' delight" — never comes to the man 
who wants to know. The man who endeavors to excuse his 
shortcomings by saying "my education was neglected" offers 
an excuse as full of holes as a sieve. Neglected by whom? 
Does he work so long and so hard that he never has a mo- 
ment for self -improvement ? Are his days so crowded with 
work that his nights must be given to resting for the next 
day? Does he not give enough time to the newspaper in 
five years to give him a college education, if he would only 
get started right and use well the spare moments? Could 
he not, if he would, find a spare hour or two every day and 
a few at the end of the week for definite, constructive, edu- 
cational work ? It is the idle man who has no time ; the busy 
man has all the time there is ! Do you not know that in two 
and a half million years the bodily structure of the human 
race has remained practically the same, and the only marked 
change has been in the size of the brain? How useless, 
therefore, to spend time in a vain endeavor to improve our 
looks; we are not responsible for our faces nor for the size 
of our hats — our head ceased growing when we were eight 
years old — but we are responsible for what is under the hat, 
and brain polish was never so cheap as now. 



THE BANK MAN IN THE MAKING 515 

It is admitted that this educational work is not easy. It 
is hard, for the reward lies in the distant and often misty 
future, and only the bravest of men can work against time. 
Play is always easy, for its reward — pleasure — is immediate ; 
but what bank man wants to be eternally playing just be- 
cause it is easy? We need the inspiration that overcomes 
the dragweight of despondency which is so apt to set in and 
tempt us to say — "Well, what's the use?" 

And what shall be this inspiration? Shall it not be the 
secret thought that somewhere and sometime a golden op- 
portunity will knock at our door and we must be ready? It 
may knock only once, and lasting will be the regret of him 
who must let it pass by. 

There is a secret satisfaction, impossible to describe, when 
the world singles you out as a "man who can," and stamps 
your self-denial as admirable, your zeal commendable, your 
enthusiasm catching, your example inspiring, your person- 
ality pleasing, *y our character honorable, your work worthy 
and well done; and as evidence that this is no vain flattery, 
hands you out the coin of the realm, the world's best evi- 
dence that it means what it says. 

Men usually get what they go after, if they go at it in 
earnest; and you can get what you go after if you go after 
it aright. The bank man, young or old, who resolves with a 
quiet resolution, as unshakable as the mountains, that he will 
not be an apprentice forever; that he will not spend all his 
days bending over a ledger; that his measure of time shall 
be full of hard work for future success; that he will climb 
because others have inspired him and shown him how — is 
bound to win. Are you that man? And he who gets the 
inspiration of an ideal, and applies himself along definite 
lines — reads that he may know, and knowing, do, will not 
only have the satisfaction of knowing that his work has been 
well done, his time well spent, his opportunities improved, 
his ambitions rightly directed, but will receive the more tan- 
gible evidence that he, too, is a king — because he can. 1 

iMr. Joseph Chapman, Jr., vice-president, Northwestern National Bank, 
Minneapolis, Minn., has for some years past, at each convention of the American 
Institute of Banking, offered a cash prize for the best paper on some phase of 
Institute work. The foregoing, prepared by the author, then Secretary of New 
York Chapter, was awarded the prize at the Rochester Convention, September, 
1911, and is here presented in slightly altered and enlarged form. In its original 
state it was issued as a pamphlet on Education by the New York State Bankers 
Association for distribution in New York State only. 



516 THE PRACTICAL WORK OF A BANK 

Things the Banker Must Know 

Business success is not, like war, to the strongest, but to 
the fairest, the just, the shrewd, the far-sighted, the 
prophets and those who, in the struggle for money, know 
the game and play it well, and who use every just advan- 
tage to their own profit. 

In every contest, however simple or complex, there are 
two conditions for success: (I) A knowledge of the rules, 
and (2) skill in performance. There must be recognized rules 
and principles to govern this contest for business success, else 
men would trade unfairly. Some would get more than they 
were entitled to, and defraud the weak and the unwary; 
therefore, we have business law — the evolution of the 
methods and customs of merchants as handed down through 
the centuries — the equitable basis of men's dealings with one 
another then and now. The banker must knosv this law and 
follow it. 

Success can only come to the banker as he understands 
these rules and precedents; the functions of money; the 
nature of business; the customs of business, and the condi- 
tion of business. He touches business life very intimately. 
His success is concident with the success of others. Only as 
the merchant succeeds can the banker succeed. 

Every banker can and should acquire a taste for banking 
law. He should, above all things, become thoroughly ac- 
quainted with the Negotiable Instruments Law, for this is 
the basic law in each of the forty- six States and territories 
where it has been enacted, and it will settle many disputes. 
The author has had the privilege of answering some of the 
questions that have come up in banking practice as viewed 
in the light of the law, and as a general proposition it may 
be stated that the banker could have answered his own query 
from this now widely adopted law. He should learn to 
read banking cases understandingly. They may look unin- 
teresting because of their legal dress; but they can, after a 
little experience, easily be understood. 

He must know how to profitably employ the funds in 
his possession ; whom to trust ; how to buy securities ; how to 
collect checks; how to run a bank. And knowing the law 
and the practice he becomes a good banker. 

The banker must know how to employ the products of 



THE BANK MAN IN THE MAKING 517 

others — to use men. He cannot do it all himself; he must 
delegate his authority. Therefore, he must know how to 
get results. Banking, like business, is cooperative, and the 
bankers must work together. The trouble in this country 
has been they have worked alone, every man for himself and 
every bank for itself. We have needed a spirit of "get to- 
gether" and all profit by the getting together. 

The banker should know banking history. "I have only 
one guide," said Patrick Henry, "and that is the light of ex- 
perience." The banker can understand the present better if 
he understands the past. Banking has been an evolution. 
Past dangers are guide posts to present safety. What hap- 
pened once may happen again. Panics have fundamental 
causes. What were they? Do they now obtain? 

He should know the banking practices of other countries. 
The Federal Reserve System is based on banking practices 
and experiences the world over. How do they do things in 
England, France and Germany, and what is the secret of 
their success, or the cause of their failure? How does the 
central bank do its work, and what are the lessons it would 
teach? This is banking history applied. And all history 
can be applied. It repeats itself. 



CHAPTER XV. 

THE MORNING MAIL 

The mail of a large city bank is enormous, both the in- 
coming and the outgoing; while that of a country savings 
bank is insignificant. It is valuable mail which, if lost, en- 
tails a large amount of labor to replace. The wonder is so 
little goes astray. The mail of a large bank will amount to 
upwards of 3,000 letters a day, containing from 35,000 to 
40,000 checks, often representing in value as much as $30,- 
000,000. 

Eut whether large or small it must have prompt atten- 
tion, for it may contain valuable instruments which must 
have immediate attention, and promptness is a virtue for its 
own sake. 

Two-thirds of the mail arrives during the night and in 
some banks is handled by a force of from twelve to twenty 
men. A few banks have men who work in shifts all night, 
so that the work is fairly well in hand in the morning, the 
mail coming in during the night being collected from the 
postoffice at various times so that it does not accumulate. 
Some banks are opposed to night work and so handle it all 
in the morning. The Chase National Bank, which has very 
extensive connections with out-of-town banks, is of the lat- 
ter class. 

The incoming mail will consist of (a) letters which are 
in the form of deposits — remittances for credit and collec- 
tion, which sometimes contain cash items, collection items, 
coupons, drafts and credit inquiries; and each must have 
proper attention; (b) acknowledgments of mail received 
and credits made, and returns of uncollected items; (c) spe- 
cial letters regarding loans, investments, credits, and other 
personal matters that must have attention by the executive 
force; and (d) circulars, magazines, bond offerings, etc. 
There is also mail for the employees — a practice which some 
banks discourage, others encourage and others just permit. 

In clearing-house cities the mail becomes an important 
part of the day's work inasmuch as a large part of the con- 
tents must go through the morning clearings, and quick 
and accurate work is, therefore, necessary. 

518 






THE MORNING MAIL 519 

Only in large city banks will it be necessary to have a 
"mail teller" whose duty it is to take charge of the mail, 
opening it promptly, proving its contents, and despatching 
the outgoing letters. The work is sometimes delegated to a 
junior officer, chief clerk or other employee who takes charge 
of the force and keeps the machinery working smoothly. 
It is the first thing that requires attention in the morning, 
and the last thing at night. 

The contents of the mail will classify itself into (a) 
Checks on local banks to go through the exchanges, and are 
turned over to the paying teller; (b) collections in the city, 
turned over to the collection or note teller; (c) checks on the 
bank itself, turned over to the bookkeeping department; (d) 
foreign items, turned over to the collection or transit depart- 
ment; (e) cash, to the receiving teller; (f) coupons, to the 
collection department; (g) credit inquiries, to the credit de- 
partment; (h) other correspondence to the proper officials 
and employees ; (i) second-class mail — too of ten to the waste 
basket. 

If there is a mail teller, of course he charges himself with 
the total of the letters, taking credit for what he turns over 
to other departments, and his day ends as it begins, with 
nothing. 

As the letters are opened and checked, the contents are 
assorted, clearing-house and other cash items being kept in a 
pile by themselves. Cash is sometimes left with the letter 
until the clearing items are disposed of, as are also other 
collections that do not require haste. 

Where the clearing-house items of the day before are 
separately listed, the items coming in through the mail will 
be added and will constitute the "morning additions." In 
some cases where it is impossible for the work to be com- 
pleted in time for the clearing, all large items are taken out 
and the others held over. The total charged out to the va- 
rious departments must, of course, balance with the total of 
the cash items received in the mail. The letters are treated 
as deposit tickets, sorted out according to the divisional ar- 
rangements of the bank, and may first be listed as deposit 
tickets in a scratcher for proving purposes. 

The mail department, or the mail work, is identical with 
that of the receiving teller's work, the only difference being 
in the impersonal depositors. 



520 



THE PRACTICAL WORK OF A BANK 



The routine in a large bank is described by Mr. A. K. 
Moore, formerly of the Chase National Bank, New York, 
as follows i 1 

Handling the Mail in a Large City Bank 

"The first batch of letters arrives at 6.30 and every half- 
hour afterward up to 9.30. The envelopes are cut and the 

MAIL TELLER-PROOF SHEET 
For 191 



Account 



Debit Clerk 
Credit Clerk 
Loan Department 
Collection Department 
Coupon Department 
Paying Teller 
Receiving Teller 

Trust Department 
Reorganization Department 
Securities Department 
Foreign Department 
Transfer Department 

Total Departmental Balances 

To-day's Clearings 

Exchanges 

Suspense Account 

Exchange 

Fifth Avenue Branch 



PROOF OF MAIL TRANSACTIONS 






contents placed on the desks of all the clerks so that on the 
arrival of the force at 8.30, each man has his share in front 
of him. At least ninety per cent, of the entire force of the 
bank has to work on the mail. As the letters are checked, 
the contents are placed in four piles — clearing-house items, 
cash routes, such as items on bankers, trust companies, mer- 
chants, commission houses, etc., checks on ourselves, and for- 
eign items. 



iBefore New York Chapter. 



THE MORNING MAIL 521 

"These items are collected by boys, each boy having one 
kind to collect. The clearing-house items go to the stamp- 
ers and then to the sorters, and finally reach the machines 
where each bank is listed and the amount proved. The for- 
eign checks go to the head of the department, who looks 
them over, keeping a careful watch for items that should not 
be sent to us, and at the same time taking memoranda of 
exchange charges. They are then sent to the collection de- 
partment, where they are sorted and listed, and the total 
charged to the collection clerk in the daily proof. 

"The checks on ourselves are sorted, listed and proved 
by machines, charged to the check department and placed 
with the exchanges received from the clearing-house, the 
check clerk carrying the total in his proof at night. The 
route items are sorted into the different routes, being listed 
on sheets for the use of the mail department and in route 
books for use of the note teller. A proof is made by a com- 
parison from sheet to book, and the total charged to the 
note teller. 

"As this work must be finished by ten o'clock, you can 
readily see that some strenuous work is necessary. Our mail 
averages about 1,500 letters daily except Monday, when it 
is double that figure. In checking off the letters any item 
having the appearance of a collection is left in the letters for 
examination by the collection clerk or the note teller, who 
has charge of the city and foreign collections. 

"As the letters are checked, they are collected and taken 
to the mail department, where the collection items are signed 
for by the collection clerk and note teller. They are then 
sorted numerically (our accounts run by numbers and not 
alphabetically as in most banks), listed in credit books, and 
strung by cords according to the ledgers, then go to the 
bookkeepers for credit on the ledgers. 

"During the day they reach the advice department, 
where their receipt is acknowledged. Later on they reach 
the check department, where the credit is made on the ac- 
count current. 

"In no other department of a bank is there so much 
chance for error. Our correspondents, having no knowledge 
of our way or mode of doing the inside work of the bank, 
the chances of error are increased. Errors caused by the 
country clerk when not caught by his city brother are sure to 



522 THE PRACTICAL WORK OF A BANK 

make trouble. The difference has to be located, and the 
hunt for a difference is very tiresome and tedious. 

"After the struggle to get to the clearing-house and to 
give to the different departments the work that comes with 
the mail (the mail department is the source from which all 
the inside daily work of the bank originates) , to find late in 
the day that you have a difference, does not tend to fill one 
with the sense of happiness that work should bring." 

Mr. Moore advocates the use of a uniform remittance 
letter, and cites in support of his claim the following inci- 
dent: 

"Some time since we received a letter by registered mail 
from a bank in a large Western city. It contained five items 
listed as cash and footed. The first item was a clearing- 
house check for a large amount. The second, five railroad 
bonds listed at par, to be sold at best market rate (which at 
that time was considerably above par) ; third, a draft on 
Tokio with a bill of lading attached, calling for a number of 
crates of bicycles; four, coupons not yet due; fifth, a sight 
draft on a flour firm with bill of lading attached for two 
hundred barrels of flour, the draft to be paid on arrival of 
the flour. The total of the letter was about $35,000 and 
that amount was charged to our bank by the Western bank. 
When we had passed it to the different departments to 
which it belonged, it looked more like a Chinese laundry 
check than a bank remittance. 

"As the only strictly cash item in the letter was the clear- 
ing-house check, the Western bank when it received our ac- 
knowledgment could not have easily located it, as their books 
showed no such amount forwarded that day. Suppose 
through our efforts in this direction, in a year from now the 
banks having a large out-of-town business should receive a 
quarter of their mail in this shape — all strictly cash items 
listed and footed; all drafts subject to payment on the arri- 
val of goods listed on a letterhead stating plainly that the 
item is for collection only, with a request to report payment 
by a collection number; all foreign items reading, "Tres octo 
Trientes dies vista," or written in foreign languages; cou- 
pons for collection, in fact all items not payable on demand 
or where there is a question of immediate payment should 
go under this collection heading. 

"If a request for a discount is made and mailed to the 



THE MORNING MAIL 523 

discount clerk, or personal letter to an officer, if all ship- 
ments of currency for credit are on separate letters and reg- 
istered or expressed, if coupons — the bane of a bank clerk's 
life — should come on separate letters with a statement 
whether they are to be taken for cash or collection; if stocks, 
bonds or securities for sale were listed and written on sepa- 
rate letters and not on the bottom of a cash remittance let- 
ter as they frequently are, if, in fact, the items could be 
handled by the different departments without the original 
letter going from one department to another, would it not 
lessen our work and the work of the officers, would it not les- 
sen the number of apologies written by officers in explana- 
tion of clerical errors? I know it would. No officer in a 
city bank would ask a country correspondent to change its 
system so as to more readily conform with the work of the 
system in the city bank. My idea carries with it little or no 
change in systems — only suggests a little care that should 
be used in forwarding cash or collection items so that the 
city bank could be reasonably sure of the wishes of its coun- 
try customer. It would make little or no more work and 
would be a great benefit at both ends of the banking line." 

Outgoing Mail 

The proper handling of the outgoing mail of a bank is 
one of its most important features and one in which great 
care is necessary. How often it has occurred that a bank 
has made a remittance to its correspondent in a reserve city, 
calculating to have a certain balance to draw upon for an 
important matter, and has had its plans delayed, and pos- 
sibly frustrated, because the letter was returned for want of 
postage, or had been mailed to the wrong bank. 

The prompt despatching of the mail is important, and 
its prompt arrival equally so. Law suits sometimes hang on 
the arrival of the mail. In a recent case it was attempted to 
show that a letter containing a large check did not arrive at 
the time claimed. If the letter arrived on Saturday morn- 
ing, there was a balance sufficient to cover it, and the bank 
was liable; if it did not arrive until Sunday morning, the 
balance was insufficient on Monday morning and the bank 
was not liable. But the evidence strongly pointed to the 
fact that the bank held the check over from Saturday, the 



524 THE PRACTICAL WORK OF A BANK 

court presuming the mails to have arrived in due course, 
which the postmarks evidenced. 

While no one is infallible, yet such a systematic arrange- 
ment can be made as to reduce the liability of errors to a 
minimum. 

After the letters are written, checked and copied, they 
are, in large banks, turned over to the mailing department to 
mail. They must go to the right banks, with sufficient post- 




STAMPING MACHINE AFFIXES AND REGISTERS THE STAMPS AS USED 

(Courtesy National Automatic Machine Co., Brattleboro, Vt.) 

age attached. The postage cost must be ascertained in total 
and in detail. 

In the mailing department the envelopes for the one 
thousand or more correspondents are addressed by the ad- 
dressograph in lots of twenty-five to one hundred of each, 
and these are assorted and distributed in tills or files, a com- 
partment for each bank, arranged alphabetically. In some 
very large banks a separate set of compartments is used for 
various divisions of the United States, each division consti- 
tuting several States. The letters for foreign countries have 
separate compartments. 



THE MORNING MAIL 525 

Before these tills or compartments is a wide shelf, at a 
convenient height for one to work at when sitting on a stool 
or chair. There are a number of mailing clerks, each at- 
tending to only a portion of the alj)habet. The head mail- 
ing clerk knows how many banks each of his assistants has to 
attend to, and every morning issues the proper amount of 
two-cent stamps so that one envelope, the one on top, in each 
compartment receives a two-cent stamp and is ready for the 
final work. At the close of the day these envelopes are 
taken from their compartments and placed in trays on edge, 
retaining their alphabetical arrangement. The trays are of 
wood, about seven inches wide, three inches deep, and two 
feet long. 

As fast as the letters are completed, they, with their en- 
closures, are given to their respective mailing clerks. These 
letters are placed in piles, laid flat. The mailing clerks sit- 
ting before the shelf, or a table, with the tray at their right 
hand and the piles of letters and enclosures at the left hand, 
select their envelopes from the trays according to the address 
on the letters and proceed to fold the enclosures in the let- 
ters, and to insert them in the envelopes, these then being 
placed in another tray. 

Improved Method of Folding Letters 

An improved method has been adopted by many banks 
in folding the letters. The letters with their enclosures are 
folded ready for the envelopes by the men who write them, 
thus greatly reducing the danger of getting the enclosures 
in the wrong letters. Instead of the letters being folded as 
customary, the reverse method is adopted, with the writing 
on the outside and the address at the head of the letter show- 
ing prominently. The letter writers put a rubber band 
around each letter to carefully retain the enclosures, and 
these folded letters are placed in trays and sent to the mail- 
ing clerks. From the address on the outside the mailing 
clerk readily selects the proper envelopes. 

As the envelopes are filled they are taken to the sealers, 
where they are sealed by a machine run by electricity. The 
letters requiring more than two cents postage are then sep- 
arated from the others, weighed, and placed in bins that are 
labeled according to the postage required, those requiring 



526 THE PRACTICAL WORK OF A BANK 

only two cents postage having already been placed in a bin 
labeled accordingly. 

A great many postal cards are used as mere acknowledg- 
ments. If there are letters to the banks to which any postal 
cards are addressed they are enclosed in the letters. If not, 
they are, of course, mailed with the one-cent postage. 





'THE NATIONAL AUTOMATIC SEALING AND STAMPING MACHINE WITH THIS MACHINE 

IT IS POSSIBLE TO SEAL AND STAMP, SUCCESSFULLY, 10,000 ENVELOPES AN HOUR 

OR TO SEAL ALONE 15,000 AN HOUR IT WILL HANDLE ANYTHING FROM A SINGLE 

SHEET OF PAPER TO A 36-PAGE CATALOGUE IT COUNTS AND REGISTERS EVERY 

STAMP USED, THUS ELIMINATING THE LOSS OF STAMPS THROUGH MISUSE OR 
CARELESSNESS 

(Courtesy of National Automatic Machine Co., Brattleboro, Vt.) 



The bins mentioned are built on the back part of the 
mailing table. They are about eighteen inches square, made 
about one foot high at the back and low in front (about 
four inches). They are generally in two rows, eight or ten 
in a row, one row above and a little back of the other, each 
bin being labeled with the proper postage denomination. 
One is marked for the registered mail. 

It often occurs, particularly on the last day of each 
month, that many packages must be mailed requiring large 



THE MORNING MAIL 



527 



envelopes. These are sorted out and given to a clerk who 
attends to that especially. 

The mail having been sealed and weighed, and dis- 
tributed to the bins., stamps are now issued by the head mail- 
ing clerk for all extra postage (over the two cents). The 
stamping is then completed, the letters are put up in pack- 
ages of fifty in each bin, and then the counting for the proof 
of the postage takes place. This being completed, and the 
statement made, the mail is ready for the postoffice. 

The registered mail, containing as it does packages of 
value, should be recorded in a book prepared for that pur- 
pose, and when the postoffice receipt for the same is returned 
it should be noted in this register and the receipt filed by 
number. 

Record of Stamps Used 

The proper care and handling of the postage stamps in 
a large bank is an important feature. The stamps are pur- 
chased in large quantities, and are generally taken care of 
by an officer of the bank. When the purchases are made a 
charge ticket is sent to the general ledger charging postage 
stamp account with the amount of money so expended. 
Each day the head mailing clerk makes out a requisition for 
the stamps he will probably need, and this is given to the 
officer in charge of the stamps. 

When the letters have all been stamped and counted a 
statement blank is filled out showing the number of letters, 
and their respective value in stamps. Such a statement 
sheet is here shown : 



J?*i4f %f*cJ0%*J 


/ 




j> 




t* 


? 


< 


/ 




,(' 










jjyo 


?,f ? 


/•*-*-£ 




'yv 


/> 


/* 


•* 


V? 


*/ 


v*r 


*S 


>S> 


' I 


/ *r 


sO<a< o*/;c/o 7 Jfo/Jatw*/>i< <A^//>2^^^ 



DAILY STATEMENT OF POSTAGE USED 



528 



THE PRACTICAL WORK OF A BANK 



A statement is sent to the officer having charge of the 
stamps at the close of each day. 

The amount shown by the "cash balance" of this state- 
ment must agree with the value of stamps and unused 
stamped envelopes on hand with the head mail clerk. 

The amount as shown by this statement as "stamps used 
$118.12" should be reported to the general ledger bookkeep- 
er by charge and credit tickets to charge an account styled 
"Mail Acct." and to credit the "Postage Stamp Acct." 



FS>ro BMM-l-07 



DA8LY POSTAGE. $ U*te*isie**S m . 



DATS 


DENOMINATIONS 








&t+ to/e 7 


lo 


So. 


4c 


to. 


So. 


8«. . 


too. 


8h6wlr,j Ca.h Values 


/ 

Stamps on hand, • . . 


/*e 


/«»7 


33 


? 


iTV 


//H 


*r» 


On band 
Receipts 
total 
Diab'rtd 

Cash 

Balance 






y 


X 


« 


i 


Stamp* received, ... 


2co 


Xeoe 


/to* 


— 


— 


— 






/ 


c 


1 






Total, 


+tt, 


■£o* J 


/6*J 


F 


>f* 


/ / ¥ 


wTP 




/¥9 





6, 


Total stamps need - - 


+** 


X%o P 


ATT* 


V 


¥4~ 


x4- 


X* 




/ 


/ 


P 


/ 


x. 


Balance stamps on band. 
Value in denominations, 


4* 


7ff 


7 f 


6 


/£ 


*1 


3* 






J 


O 


f 




$ .4c 


>'<f* 


$3/6 


$ «3» 


i_£> 


$ l/*- 


tS.co 


* 



Time mailed..,.^.:«..S?.P...^r./«fef. 
Nnmbet of lettertsent....^.*:.^:..?.. 



.^../S..^*MU^fe. 



DAILY STATEMENT OF POSTAGE 



"The Postage Stamp Acct." will then show the total 
amount of stamps on hand, both in the officer's and the 
head mail clerk's hands, and the "Mail Acct." will show the 
actual expense. This can be done at the end of each week, 
or at the close of the month if preferred, by keeping these 
daily statements carefully filed and making a total of the 
amount used, with the adding machine. The total balance 
on hand as shown by the "Postage Stamp Acct." can be 
verified at any time. 2 



Filing Bank Correspondence 



After it is no longer the day's mail it becomes exceed- 
ingly valuable as a record, and the old adage: "Never write 
a letter and never destroy one" is apropos. But banks both 
write and destroy — afte • waiting a reasonable time to allow 

2With acknowledgement to A. R. Barrett in The Bankers Magazine. 



THE MORNING MAIL 529 

for any differences to be settled, particularly in collection 
letters. 

The filing is now usually done in vertical files, using 
steel or wooden cases built for that purpose. The enclosures 
are manilla folders, and the filing is done by number, by 
subject, or by name, the latter lending itself to many classi- 
fications, such as geographical arrangement, with as many 
sub-divisions as the needs may require. In some cases the 
filing is done by number, each correspondent being given a 
number, which number appears on the manilla folder and 
is indexed by card alphabetically. 

The classification may also be by subjects, and the let- 
ters filed under subject and there classified by names or 
numbers ; but the more satisfactory way is to file by names, 
as the name of the person or the corporation is always 
known. 

If filed by number, there must be a card index to locate 
the number, making the additional work of finding the num- 
ber both before filing and before reference. Thus, the let- 
ters of the First National Bank of Boston would be under 
file No. 175, and all letters from that bank would there be 
filed. In the card index, all Massachusetts correspondents 
would be indexed under that State and all Boston banks 
under Boston, and we would, therefore, look under Massa- 
chusetts — Boston — First National Bank, and find No. 175. 
Turning to file 175 we would find the letters arranged by 
dates. There might also be a separate file for individuals 
and one for banks. 

It is the custom of banks to keep letters for a certain 
length of time before destroying them. Thus, letters of 
each day are finally put in bags and labeled, and each day 
a bag is destroyed. Banks must decide for themselves how 
long to keep correspondence. Some keep letters six years, 
others longer, and others destroy remittance letters after the 
account has been reconciled. It is a matter of judgment; 
but merely remittance letters need not be kept as long as 
letters involving more important subjects, for the account 
once reconciled, the letters which contained the items are 
no longer of vital import. But due allowance must be made 
for errors and time allowed for adjustments before corre- 
spondence is destroyed. 

35 



530 



THE PRACTICAL WORK OF A BANK 



A Practical Filing System 

Bank correspondence in an institution of average size 
may be divided as follows: 

1st — General Correspondence. 

2nd— Corresponding Banks. 

3rd — Miscellaneous Banks. 

4th— Credit File. 

Apart from the above, the savings, trust and safe de- 
posit departments of a large bank will require their own 
files. 

1st — General Correspondence. 

Illustration No. 1 shows the best method for filing gen- 




NO. 1 
FOR GENERAL CORRESPONDENCE 



eral correspondence with customers and others. This is 
known as the Direct Name System of Vertical Filing. The 
principle of the system is to keep together in one folder, all 
correspondence with each important correspondent, and to 
file miscellaneous letters in alphabetical folders. 

Grey pressboard guides with celluloided tabs bear the 
divisions of the alphabet as shown in the illustration. The 
guide tabs are arranged in two rows at the center, and just 
to the left of the center of the file drawers. In the case 
of a small bank a simple set of No. 25 guides — one for each 
letter of the alphabet — is sufficient. For larger files a larger 
sub-divided set may be obtained, sets being available in any 
desired size. 



THE MORNING MAIL 



531 



For important correspondents there are individual fold- 
ers at the right of the file with wide tabs on which are writ- 
ten the names. Miscellaneous letters are filed in alphabet- 
ical folders with tabs at the left edge of the drawer. The 
tabs of all of the folders are of the same height as the guide 
tabs, and reference to the folders is thus facilitated. 

The guides in any set are numbered consecutively, com- 
mencing with No. 1 on the first or "A" guide, and running 
to No. 25 on the "Z" guide in the case of a set of No. 25 
guides; to No. 40 in the case of a set of No. 40 guides, and 
so on. The alphabetical folders at the left of the file are 
printed and numbered to correspond with the guides. When 
an individual folder with right-hand tab is made out, it is 
numbered to correspond with the guide behind which it be- 
longs. This numerical feature acts as a check on accuracy 
in refiling folders. When a folder has been removed for 
reference it is filed with the greatest speed and accuracy 
through the simple expedient of noting the number and 
placing the folder behind the guide of that number. This 
is, needless to say, much quicker and more accurate than if 
it were necessary to read the individual's name and then 
find the alphabetical guide behind which that name belongs. 

2nd — Corresponding Banks. 

The volume of matter to be filed in the case of corre- 
sponding banks requires a separate and distinct division of 
the file for each bank. Illustration No. 2 shows how this 




NO. 2 



FOR CORRESPONDENCE WITH CORRESPONDING BANKS 



532 THE PRACTICAL WORK OF A BANK 

division is accomplished through the use of pressboard 
guides with metal label holders for each bank. All corre- 
spondence, remittance and collection letters are filed in 
folders back of the proper bank guide. Monthly folders are 
generally used for this purpose as shown in the illustration, 
although in the case of some of the smaller corresponding 
banks, it may be sufficient to use an expanding folder, or to 
use bi-monthly or semi-annual folders. 

The. method shown in the illustration will answer in the 
case of small and medium-sized banks. In some of the 
larger banks it is necessary on account of the bulk of the 



TRANSFER CASE FOR FILING OLD CORRESPONDENCE 

matter to separate it into classes through the use of colored 
folders. Each folder may contain the correspondence for 
a period of one or two months. These colored folders are 
filed directly back of the guide in place of the monthly fold- 
ers. Each class of correspondence is distinguished by a dif- 
ferent color, and the tabs of the folders are printed in some 
such classification as follows: "Official," "Sundry," 
"Acknowledgments," "Collections," "Cash Letters and Re- 
turns for Transient Accounts," "Letters of Advice." 

The contents of a file of transit correspondence is gen- 
erally transferred at from intervals of two to six months, 
depending upon the length of time during which reference 
is desired to these original documents. It is transferred to 
vertical drawer style transfer cases, where the folders are 
kept in the same order as in the active file. 

In the case of small banks where reference to transit 



i 



THE MORNING MAIL 533 

items is infrequent, the plan is sometimes followed of filing 
all this correspondence by date, using month and day guides. 
The vouchers for each day are arranged in alphabetical 
order. 

The Shannon file is also used for this purpose, the illus- 
tration showing the Shannon file drawer with double arch. 
All papers are perforated and filed over the arch in order 
of date, and a single drawer will hold a month's correspond- 





THE SHANNON FILE 



ence in the case of a small bank. The entire contents of the 
drawer is removed and put in a Shannon transfer case, as 
shown in illustration, where it may be secured at any time 
by reference, first to the date, and second to the name, 

3rd — Miscellaneous Banks, 

On account of the similarity of bank names, it is best 
to file this class of correspondence by towns. Illustration 
page 534 shows a very convenient method. Alphabetical cel- 
luloided guides are used just as shown in illustration, 
but they are for dividing town names instead of individual 
names. Each bank is given a folder with a right-hand tab 
on which is written, first, the name of the town, and be- 
low it the name of the bank. Each folder is numbered to 
correspond with its guide which effectually prevents mis- 
filing. Note folders for First National Bank of Alton and 
Cairo National Bank, in the illustration. If a letter is re- 
ceived for some other bank in Alton, it is filed in the "A" 
folder at the left of the drawer, which is reserved for mis- 
cellaneous purposes. 



534 



THE PRACTICAL WORK OF A BANK 



In the case of a large city like Chicago, where corre- 
spondence is carried on with several banks, it is advisable 
to insert a guide with metal label holder printed "Chicago," 
in the proper position back of the "C" guide. Each Chi- 
cago bank is then given a metal label holder guide which 
is placed back of the Chicago guide, as in the case of the 
Continental and Commercial National Bank and Corn Ex- 
change National Bank, in the illustration. If necessary, 
monthly folders are used for these large banks. 

This method of indexing correspondence with banks 
other than corresponding banks is extremely elastic, and 
may be used by the very small or the very large bank. A 




FOR CORRESPONDENCE WITH OTHER BANKS 



small bank will use a set of No. 25 alphabetical guides for 
dividing the towns, and a large bank may use a set of guides 
several times that size. Folders for individual banks are 
made out as required, and special guides for large cities and 
large banks are inserted wherever necessary, to permit of 
the use of the monthly folders. 



4th — Credit File. 

In the large banks the credit file assumes large propor- 
tions. The vertical file is, of course, used, and the princi- 
ple is followed of keeping each individual's papers in a sep- 
arate folder. Many credit files employ the numerical 
method, each name being designated by number, and fold- 
ers arranged in that order. This requires the use of a card 



THE MORNING MAIL 



535 



index arranged alphabetically with all desired cross refer- 
ences. 

The Direct Name System which is shown in illustration 
1 may also be used to good advantage as a credit file, pro- 



^^JBflEB^^^^HPi 



CREDIT FILES 



viding as it does a separate folder for each customer in which 
are filed all original papers regarding that customer's credit. 
There is a decided tendency toward the use of steel cabi- 
nets for filing bank records. This originates in a desire to 
protect records against fire, but it is nevertheless true that a 
single wall steel cabinet offers much less resistance to fire 




FOLDERS IX DRAWER 



than a well-made oak cabinet. If protection is to be assured 
a cabinet with double walls throughout, lined with asbestos, 
should be obtained. The illustration shows such a steel cabi- 
net of the four- drawer upright style used for bank corre- 



536 



THE PRACTICAL WORK OF A BANK 



spondence. All outer surfaces of this cabinet are composed 
of double steel walls completely insulated by cellular asbes- 
tos. Every drawer is equipped with a safety latch which 
automatically fastens the drawer when it is closed, and ef- 
fectually prevents destruction of the papers from a small 




MANILLA FOLDER FOR FILING CREDIT INFORMATION 

blaze which would otherwise consume the contents of an 
open drawer. These steel cabinets are a radical departure 
from any cabinet previously placed on the market since all 
other cabinets lack the double walls and asbestos used 
throughout as well as the drawer catch feature. 3 



3The above was prepared by the Yawman and Erbe Company of Rochester, 
N. Y., by request of the author for what they considered a proper filing method 
for the mail of the average bank, and acknowledgement is here made for their 
valuable contribution. — W. H. K. s Jr. 



CHAPTER XVI. 

COST ACCOUNTING AND ANALYSIS OF 
ACCOUNTS 

The tendency of all business is to a more accurate and 
scientific basis of operation. It no longer suffices to know 
the approximate cost of producing an article, and the cost 
of selling it, competition having compelled manufacturers to 
know to an exactness what the cost of production has been, 
including a proportionate charge for all overhead expenses 
incidental to marketing the product. Loose methods have 
resulted not only in loss of business but in bankruptcy. 

To figure that cost of raw material plus wages equals 
the cost of production is deceptive; for in the cost of pro- 
duction must be included depreciation and wear and tear on 
plant, rent, administration charges, duty, freights, etc., so 
that each article shall, in its selling price, include some por- 
tion, however small, of the genera] overhead expenses, as. 
well as return its first cost and a profit. 

Banking of late years has followed the same lines. Bank- 
ers are no longer satisfied to know that they have made a 
profit — they want to know where the profit came from and 
how it arose. It is needful that the sources of profit be 
known in order that the sources of loss be also known. 
While losses must attend all business, the source and the 
reason for the loss must be located, else the little leaks may 
spring into big ones. 

Banks are more and more giving attention to the exact 
cost of doing business. They rightly want to know who are 
profitable customers and who are not. It may be that a de- 
positor carries a good balance, and on its face would seem 
to be decidedly desirable, but when it comes to determining 
what the account costs the bank, and what it earns, it may 
show a loss. 

Bank Profits 

The general sources of a bank's profits are: (a) The 
loan of its capital; (b) the loan of its deposits; (c) ex~ 

537 



538 



THE PRACTICAL WORK OF A BANK 



change on collections; (d) investments; (e) profit on circu- 
lation. 

The funds from which it derives these loan profits come 
mainly from its capital and its deposits. The profits from 
bank note issues under the National Banking Act are not 
large, due to the low income from bonds, their high cost and 
the expenses attending note issue. 

The profit from making acceptances is yet a new venture 
in our banking scheme, while exchange profits will, under 
the Federal Reserve Banks, be greatly reduced. The loan 
of its deposit funds is, therefore, the main source of profit, 
and before it can loan monev it must first obtain it. 



BBESEtmAaa 



NAME 










































1913 


1914 


1915 


1916 


1917 


1918 


CMTIriCATE 


1 AVERAGES 


AV. B*L 


MO OF 

ITEMS 


AV. 8AL 


NO OF 


AV.BAU 


NO OF 
ITEMS 


AV. BAI_ 


ITEMS 


AV BAI_ 


tfzSZ 


AV. BAI_ 


n%% 




AMOUNT 


JANUARY 




00, 






00. 






00. 






00. 






00. 






00 








00. 


February 




00. 






00. 






00. 






oo. 






00. 






00 








00 


March 




00. 






00. 






00 






op. 






00. 






00 








op 


ARRtk 




00 






00. 






00 






00. 






00. 






00 








op, 


MAY 




00 






00. 






00 






00. 






00. 






00 








00, 


-JUNE 




00 






00. 






00 






00. 






00. 






00 








00. 


JULY 




00 






00. 






00 






00. 






00. 






00 








00. 


AUGUST 




00 






00. 






00 






00. 






00. 






00 








00. 


SCPTEMBEf 




00 






00. 






00 






00. 






00. 






00 








00. 


OCTOBER 




00 






00. 






00 






00. 






00 






00 








OP, 


NOVEMBER 




00 






00. 






00 






00. 






00. 






00 








pa 


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00. 






00 






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sta 








JHW 



, CROSS INDICATES TMAT THE BALANCE 



IS LESS THAN $100. 

CARD HE CORD OF 



AVERAGE BALANCES 



It is obvious that if a man deposit with a bank a certain 
sum of money which the bank may use as its own, repay him 
as he orders, but in the meantime loan part of it out, the 
bank derives a distinct advantage. It is not all net profit, 
because there is the cost of keeping the loaning machinery 
in operation and the cost of the money itself. The differ- 
ence between what it costs to carry the account and to ad- 
minister it, and what is received from loaning the funds is 
the bank's profit. 

But if the deposit is not money, but a form of credit 
which must be converted into money and cannot be loaned 
until so converted, it is plain that the bank does not get the 
profit attending a cash deposit. And if incidental expenses 
creep in that were not contemplated in the cost of obtaining 



ANALYSIS OF ACCOUNTS 539 

and administering the account, the profit will be reduced ac- 
cordingly. 

In such cases careful analysis of the account must be 
made to determine its profitableness, or what would, on the 
face, seem to be a profitable account may be a losing one. 
Many banks have concluded that the better plan is to charge 
for the collection and pay interest if the balance warrants; 
while others make no charge for the service and pay no in- 
terest. It is a matter of opinion. 

Profitable and Unprofitable Accounts 

The function of the analysis department is to determine 
the profitableness of the accounts. This process is described 
subsequently. But as a proposition in finance and banking, 
every account must show a profit to the bank in some f orm> 
however remote, or it is not a desirable account. There are, 
in all places, men who carry bank accounts simply for busi- 
ness convenience. They never stop to consider the right of 
the bank to a profit on the account. They draw against un- 
collected funds, deposit only enough to meet their checks as 
they calculate they will be presented, and are more or less 
short of funds all the time. These, like the proverbial poor, 
will ever be with us. What to do with them is the problem. 
Some banks have decided to make a charge if the average 
balance is below what has been decided to be profitable; 
while others suffer the evil with the best grace possible, and 
all would welcome the day when every depositor recognizes 
the right of the bank to a profit on his account and acts ac- 
cordingly. 

An interesting calculation was made by a clerk in a large 
city bank. On one account in this bank there were depos- 
ited a large number of "collection" notes at stated intervals. 
So far as ordinary analytical processes showed, the balance 
carried, $25,000, was sufficient to cover all expenses in the 
nature of exchange and time cost, the usual test to which an 
account is put. There was, however, another element in this 
case which was carefully estimated. If the bank had re- 
ceived from all its $50,000,000 line of deposits an equal 
number of items for every $25,000, there would have been 
required at least 7,500 clerks to handle only this particular 
end of the business! 



540 THE PRACTICAL WORK OF A BANK 

The Bank's Service to the Depositor 

The bank performs a service to the depositor that no 
other institution does. Aside from its function of note 
issue, deposit and discount, it occupies a very useful place in 
the business scheme. Let us see what the bank does for the 
depositor aside from lending him money. It receives his 
funds — money, checks and other instruments of credit on de- 
posit and for collection. The money it keeps safely; the 
other items it turns into money sometimes without cost. It 
furnishes him with a check-book and pass-book free; pays 
his checks as he directs; returns the receipted vouchers with 
a statement rendered ; often makes up his payroll ; furnishes 
money in such form as is requested; guarantees that the 
party to whom the check is payable has received the money ; 
and warrants not to pay on forged orders. The value of 
this service is frequently forgotten or unappreciated. 

With this checking privilege and all it means in mind, it 
is not unreasonable to ask the depositor to keep a balance 
commensurate with the service rendered. The bank is un- 
der expense in doing all this, and it is most assuredly worth 
something to the depositor to have it done. But in the com- 
petition for business, and the tendency of customers to ask 
interest on their balances, banks have been paying interest 
on balances that are too small to earn the interest credited 
and show a profit to the bank, when the acid test of cost 
accounting is applied. The result has been, in not a few 
cases, that the bank has built up a deposit line and lost in 
net income, so that liquidation became necessary in order to 
save the institution from becoming insolvent. Many large 
banks whose names are now in banking history, have suf- 
fered from the evils of paying too much for business. 

The Quality of the Account — Its Influence 

It is of importance in all banks, but particularly in large 
ones where the depositors are not all known personally, to 
determine what land of an account the customer carries, and 
also the influence of the depositor on other depositors. The 
individual balance is important, but other balances that exist 
because of the depositor's friendship for the bank are equal- 



ANALYSIS OF ACCOUNTS 



541 



ly so. He may have introduced friends. His family con- 
nections may be important. 

This cannot satisfactorily be determined by depending 
upon the bookkeeper's memory, or the memory of officials, 
and it becomes needful that a record of the accounts be kept 
from this standpoint. To properly record these facts, cards 
are kept containing full details as to the history of the ac- 



ANALYSIS OF ACCOUNT FOR 



191 



Average balance 


$ 




AMOUNT RECEIVED 






Out of town $ «„«_ 






New York Exchange $ 






Total * 






Outstanding- _- .^...days 


* 


__. - 


Available balance 


$ . 




Less reserve 


* 




Loanable money 


* -..- 





Interest @ . 

Exchange received 
LESS 

Interest Paid 
Exchange Paid 
Profit 



' on loanable money 



ANALYSIS SHEET FOR ANALYZING ACCOUNTS 



count; the average balance; date opened; by whom intro- 
duced; kind of business; whether a box renter, borrower, 
etc., and if new business has been introduced through that 
connection. 

It is not a difficult matter to estimate the average bal- 
ance each week. If the balance for each of four days is 
placed in a separate column, once a week, the average can 
be arrived at by a mental calculation. This is not, of course, 
exact, but if made for a period of time, is fairly indicative 
of the status of the account. 



542 THE PRACTICAL WORK OF A BANK 

Every account on a bank's ledger has some bearing upon 
the profit or loss account of the bank. The banker aims to 
serve the public, but should not do so at the expense of his 
stockholders, to whom is due a profit from the use of their 
capital. The bank justifies its existence through its many 
collateral services rendered to both customers and those who 
are not. The banker is not a philanthropist, but a business 
man, realizing that service brings its own reward, and he 
who serves best obtains the largest reward. The banker can- 
not charge for every service rendered; to do so would be to 
invite competition and lose much profitable business; but he 
should be compensated for the valuable and steady services 
which attend the keeping of an account with a customer. 

But if it were not for the accounts on its books, the bank 
could not exist, and the handling of accounts is the reason 
for the bank's machinery; the capital and surplus being in 
the nature of a guaranty fund which the stockholders have 
contributed to safeguard the accounts. On the surface the 
large accounts would naturally seem to be the paying ones; 
but when it is considered that upwards of 50,000 and even 
100,000 items have been known to go through a single ac- 
count in a month, the cost of clerical labor will manifestly be 
greater than on an inactive balance, and due consideration 
given in the cost accounting scheme to the labor cost. 

The small account is the problem. They are numerous, 
and the balances often small — so small as to be almost a 
negligible quantity. And the problem is whether to refuse 
them, and thus drive away future business, or make a charge 
for carrying them, or accept them as they come. A small 
balance carefully nursed along may prove in the end a most 
desirable one. The owner may have a struggle, and the ac- 
count may show the evidence thereof, but once he gets es- 
tablished he may prove a very desirable customer, and the 
poor depositor often becomes a very good borrower; and a 
good borrower is often excused for keeping a small balance, 
for good borrowers are the life blood of banking, and good 
borrowers are as necessary as good depositors. 

Penalizing Small Balances 

There are banks and trust companies in every large city 
that have adopted the rule that if a depositor does not keep 



ANALYSIS OF ACCOUNTS 543 

an average balance of a certain amount (in some cases $200) , 
a small fee is charged, which penalizes drawing the balance 
below that amount. The reason is that the bank has de- 
cided, either upon careful investigation, or upon mere esti- 
mate, that a balance of less than a certain amount is not a 
profitable one; although in certain cases the rule has been 
made discretionary, as it necessarily must be ; for many small 
accounts are in the nature of accommodation to those who 
are connected with firms and corporations carrying large 
balances, and the small account is a courtesy to one of the 
officials. If the reason for the charge is explained to the 
customer, he will quickly see the justice of the bank earning 
a profit on every account, however small that profit may be. 



Cost Accounting in Banking 

Tersely stated, the proposition in cost accounting in 
banking is to apportion the expense incidental to an account 
to that account, and to credit to the account its proportion 
of earnings, which may be more accurately ascertained than 
the costs. One of the aims of cost accounting is to arriye at 
the usable balance. For example, a bank might have an 
account with $10,000 average balance, and one-half the 
amount might be in process of collection, and, therefore, the 
bank has but $5,000 as a usable balance. From the $5,000 
the reserve must be deducted and the balance must carry 
the burden of earning the interest paid on the whole ac- 
count. If the loanable balance earns less than the whole ac- 
count costs, it is a losing proposition. The actual usable 
balance is, therefore, the basis upon which all bank earnings 
are founded. 

The first essential is to ascertain the loanable balance by 
finding the average balance, from which must be deducted 
the amount credited, but in process of collection, and the re- 
serve. It is obvious that a bank cannot loan what it does not 
possess, and funds in the mails are not funds in hand, and 
assuredly the bank cannot loan its reserve. Therefore, from 
the average balance, or actual balance, these items must be 
deducted. The earning power of money must then be ascer- 
tained for the period, and the account credited with its prop- 
er proportion. 



•544 THE PRACTICAL WORK OF A BANK 

Administrative Costs 

The greatest problem in cost accounting for banks as 
well as commercial houses, is the administration costs. It is 
comparatively easy to determine how much clerk hire, sta- 
tionery, postage, rent, light and heat should be apportioned 
to each department of the work, but when it comes to pro- 
rating the administration costs, it is difficult to adequately 
determine how much of the supervising expense belongs in 
a single department. It might be done by determining what 
proportion of the gross profit each department contributes, 
and charging thereto for administration a proper proportion 
of salaries, etc., but to carry the charge down to individual 
units is often difficult. 

Cost accounting being an inexact science, many of the 
fixed charges must necessarily be estimated. For instance, 
we have five adding machines in the transit department. 
They cost $500 each. Their life may be six years or ten ; but 
the cost should be distributed as nearly as possible over the 
life of the machine, and its cost made part of each year's 
operations ; but at best this would be an estimate. 

Exchange Charges — Interest 

In order to know the cost of an account as respects ex- 
change charges and loss of interest, the items that are col- 
lected must be analyzed, their cost known, and the time con- 
sumed in making the collection figured, so that the interest 
loss will be possible of computation. Thus, an item sent to 
San Francisco will consume about five days going, the same 
returning and probably one day's delay in the bank. Twelve 
days' interest is, therefore, lost before the funds can be 
loaned, and this is a factor of no small import. 

The National Bank Act has so framed the banking laws 
of the country that the reserve cities become almost involun- 
tarily the clearing centers as well. But while this is logical 
and the most convenient method of transferring credit in the 
shape of checks, yet the bank act has left us absolutely with- 
out a common medium of exchange. We are forced, there- 
fore, to use actual money, which is expensive to ship; or 
New York funds which, in view of the clearing-house rules 
of that city, are expensive to create. There is, therefore, a 



ANALYSIS OF ACCOUNTS 545 

considerable item of expense placed upon the banks in the 
handling of the commerce of the nation, the only offset to 
which, except an actual charge, is the compensating balance 
of the depositor. This expense is represented chiefly in what 
is known as "exchange charges" which is perhaps the sub- 
ject of the greatest importance in cost accounting. That 
there are all sorts of abuses and evil practices abroad in the 
land is a matter with which most bankers are familiar. These 
conditions are of especial import to the analysis department 
whose duty it is to see that the bank is not imposed upon 
either by its customers on the one hand, or by collecting 
banks on the other. 1 

The Earning Power of Money 

To estimate that money earns an average of five per cent, 
is mere guess work; and to conclude that a certain rate has 
been earned on a certain balance is to segregate each loan 
and apply it to some particular deposit — an impossible task. 
The correct way is to ascertain the actual earning power of 
the bank for a period, by dividing the interest received from 
loans and investments by the average amount outstanding, 
thus getting an average rate. This being ascertained, the 
account may be credited with its earning power, and the 
result known to a considerable degree of accuracy. Each 
account is then treated as if it were the only account on the 
books. 

Special Costs 

There are some accounts that have special costs attend- 
ing their work, which should be a charge to them individual- 
ly and not to all. For instance, one large bank handles the 
accounts of a railroad. It sends messengers each day to col- 
lect the funds turned in by the conductors and agents, in en- 
velopes sealed, as representing their trip returns and cash 
receipts. It counts the money and proves the listing. The 
checks, if any, are collected, payrolls made up, dividend 
checks prepared, and, in fact, the bulk of the cash receipts 
and many of the disbursements of the railroad are made 
not through, but by, the bank. The cost attending this ac- 



iQuoted, author not known. 

36 



















51 










































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546 



ANALYSIS OF ACCOUNTS 547 

count is much greater than on the accounts as a whole, and 
its greater cost should not be placed on the ordinary ac- 
counts, which have no such special favors. In return the 
company carries a large and profitable balance. 

For every bank to go into the matter of cost accounting 
extensively and scientifically, would not be warranted; 
neither would the other extreme of too much laxness be 
wise. A scheme too elaborate might cost more than it would 
save; therefore, a middle ground might be chosen that will 
give the results desired without the burdensome expense at- 
tending. 

Cost accounting simply aims to furnish information, but 
does not attempt to dictate the policy of the bank toward a 
customer. That an account shows a loss, is not to say it 
should be closed. The analysis is a straw to show which way 
the wind blows and the officials must decide what policy to 
pursue. 

A wide divergence of opinion exists in these matters and 
is easily accounted for, as men differ as to what is or is not 
a proper charge against an account, and the methods by 
which this charge is to be ascertained. Given the same prob- 
lem and the same state of facts surrounding it, no two would 
agree in the result. Mr. E. H. Ensell of the National City 
Bank, New York, has made a close study of this question, 
and shows the possibilities of error in these calculations to 
be great. Writing at different times and in different places, 
Mr. Ensell says: 

Three Theories or Apportionment 

"There are three distinct and separate theories in exist- 
ence with regard to the apportionment of the earnings and 
expenses among the accounts. The first theory is that all 
the service of the different departments of a large commer- 
cial bank should be held at the indiscriminate disposal of all 
the customers; there should be no distinction made between 
a maximum use or a minimum use of the benefits of the vari- 
ous departments; no discrimination between an account that 
requires much labor or little labor in its handling. This 
theory works well where there is no wide margin of differ- 
ence between the most active and the roost inactive account. 

"The second theorv is that all the service of the different 



548 THE PRACTICAL WORK OF A BANK 

departments represents some definite cost that may be traced 
to the accounts that take advantage of this service and 
should be compensated for either directly or indirectly in 
each case. This theory represents the ideal condition, but 
could never exist on account of the indirect influences con- 
tinually at work, and which do not always appear on the 
surface. 

"The third theory is a combination of, or a compromise 
between the other two theories; that is, some of the depart- 
ments exist as a general accommodation, the value of which 
may not be determined in dollars and cents, but that the 
service of other departments represents a definite expense 
that may be found to exist for the benefit of one certain 
class of depositors over another class. It is on the basis of 
this third theory, the reasonable middle course, we have the 
two natural units of cost in the banking business. First, the 
unit of cost on the basis of dollars of balance to be adminis- 
tered; second, the unit of cost on the basis of labor, or items 
to be handled. 

"In order to arrive at these two units of cost it is neces- 
sary to separate the cost of the two different classes of ser- 
vice. The administration expenses must be separated from 
the labor expenses. In considering the labor expenses only 
the departments whose time is continually occupied in hand- 
ling items should be included, such as, the receiving teller, 
the mail teller, the check desk and bookkeepers, the transit 
and city collection department, in short, all the labor depart- 
ments. All other departments, such as the loan department, 
the credit department, the discount department, etc., are oc- 
cupied in the earning operation. They handle a minimum 
number of the items and the cost of these departments is to 
be applied to the accounts on the basis of dollars of balance 
to be administered. 

"The accounts then are the raw materials with which a 
bank does business. It is no longer a question of how much 
the accounts cost or earn — since all the cost and earning has 
to be passed back to the accounts — but how to apportion the 
cost and earning on an equitable basis. 

"There are two fundamental mechanical operations in 
the banking business. First, the earning, and second, the 
labor operation. The earning operation is principally the 
lending of money. It is on this operation we have the unit 



ANALYSIS OF ACCOUNTS 549 

of cost on the basis of the dollars of balance to be loaned or 
administered. The second unit of cost in the labor operation 
is best reduced to the handling of items, and we have the 
unit of cost of each item handled in each different depart- 
ment. 

Units of Cost 



4 'The question now arises how to figure out the units of 
cost on these two different operations. There are a number 
of methods, some very complex and complicated, others that 
are simple and direct. Some of the methods attempt to ap- 
portion the floor, desk room, overhead and fixed charges, 
and to divide the clerks' and officers' time, etc. This method 
is complicated and defeats its own purpose. 

"The most direct and simple method that would include 
all the elements, both clerical labor and a right proportion 
of the fixed charges, overhead expense, and administration 
expenses, of cost in handling items in the items department 
would be to charge into the items department: First, those 
expenses that are direct, such as clerk hire, bookkeepers, 
books and stationery, etc. ; second, to include in this amount 
already charged to the different items departments a fair 
proportion of the other fixed charges. This amount may be 
best found by adding the totals of the direct expenses 
charged to the different items departments and see what 
ratio they bear to the total of all other operating expenses, 
and by reducing the general operating expenses an amount 
in proportionate ratio which the direct figures already in the 
items departments bear to the general operating expenses, 
and distributing this amount deducted proportionately 
among the items department we now have a very accurate 
proportion of fixed charges, overhead expenses and adminis- 
tration expenses in the items departments to cover the indi- 
rect expenses in handling the items. 

"The remainder of the general operating expenses would 
be applied to the dollars of balances left on deposit to be ad- 
ministered. By dividing these general operating expenses 
by the number of dollars of deposits would give the unit 
cost on one dollar of deposit to cover the expense of adminis- 
tration. By dividing the total of both direct and indirect ex- 
penses of the different items departments by the number of 



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ANALYSIS OF ACCOUNTS 551 

items in each department would give the unit of cost for 
handling one item in each of the items departments. 

"The analysis of an account after any direct elements of 
cost were charged directly, would appear like this: In the 
first place, you have the general daily average balance; this 
is the average balance as shown by the ledger. It is neces- 
sary to reduce this average by the average amount of cash 
that has already been credited up, but is continually out- 
standing in the process of collection; the remainder of the 
average balance thus reduced would have to be further re- 
duced by the percentage of reserve that a bank is required, 
either by the national or State law, to keep idle in the vault. 
The final result is the available loanable balance with which 
a bank has to do business. This available balance at the 
average earning rate of interest will be the amount the ac- 
count would earn. To this amount eai'ned must be added 
the amount of exchange earned by the account. The two 
added together would give the total earning capacity of the 
account for the period under consideration. 

"On the other side of the analysis would appear the daily 
average balances at the unit of cost per dollar for adminis- 
tration, the number of items handled in each department at 
the unit of cost for each class of items, the amount of inter- 
est paid to an account on its net average balance, and the 
amount of exchange paid for handling the out-of-town items 
for the account. All the costs to be added. The difference 
between the two sides of the analysis would show what an ac- 
count earned or cost during the period. 

"In all banks there are a number of accounts having 
some peculiar cost or earning feature attached to them by 
reason of which they could not be considered in a class with 
any other account ; such accounts would have to be analyzed 
separately. It would be impossible to analyze each account 
separately, however, therefore, the accounts must be an- 
alyzed by classes or groups. 

"For this reason the result of three different methods of 
analysis will be compared. A wide margin of difference will 
be shown to exist between the results of the different 
methods: (a) The lax method of analyzing an account by 
approximating its cost through estimating the cost of labor 
to handle it; (b) the more definite analysis of an account, 
but still without proper regard for the indirect or 'overhead' 



552 THE PRACTICAL WORK OF A BANK 

charges; and (c) the analysis of an account on the approved 
scientific basis. 

"In order to make the illustration more clear the same 
large, very active account with an average balance of, say, 
$1,000,000 will be used in each case. The period of time 
under consideration is one year. Regarding the compara- 
tive worth of the different methods used and the results ob- 
tained certain definite conclusions may be arrived at. The 
account used to illustrate may be said to be an extreme ex- 
ample; still it is a possible one and the final result in exam- 
ple 'C will indicate how unproductive an apparently valu- 
able account may be. 

"In the first example, 'A', a common method used at 
present is to attempt to arrive at the cost of an account by 
determining the labor or clerk hire expense. This is accom- 
plished by averaging the cost of clerk hire and estimating its 
value as in the following illustration. Some bank officers are 
willing to guess at the earning capacity of an account. They 
consider only the cost of handling on a direct basis, elimi- 
nating the important elements of administration expenses, 
fixed and overhead charges attached to the handling. They 
merely make a mental calculation to allow for expenses that 
do not appear on the surface and assume that roughly an 
account is worth what it may earn on the gross daily average 
balance less the direct expense of handling. To make the 
contrast between the three different methods of analysis 
more striking the average balance in example 'A' will not be 
reduced by the amount in transit or the reserve held against 
the deposit. 

EXAMPLE "A". 

Estimated Cost Account 

Daily average balance, $1,000,000. 

Average earning rate 4%% $45,000.00 

One man 2y 2 hours daily account current for year $757.30 

Two men 15 minutes daily to handle acceptances 151.30 

Three men 2y 2 hours 4 times a year, account dividends 30.00 

One man 10 minutes daily to examine indorsements 32.00 

Four men 20 minutes daily examining signatures 99.40 

One man four times a year 15 minutes, special 79.00 

One man 10 minutes daily handling checks 50.50 

Total cost of handling account — 1,199.50 

Estimate value of account for year $43,800.50 



ANALYSIS OF ACCOUNTS 55a 

"According to the foregoing example 'A' the estimated 
labor cost of handling the account for the year would 
amount to $1,199.50, while the daily average balance of $1,- 
000,000 would have earned $45,000 at the average earning 
rate of four and one-half per cent. 

"The estimated cost of clerk hire in connection with an 
account, however, is not accurate enough to cover the cost of 
handling even without considering any other direct or indi- 
rect expenses attached to an account. There is considerable 
time of clerk hire which is lost or unaccounted for ; therefore, 
this method of estimating the cost of an account is very in- 
accurate. Further, to assume that a daily average balance, 
as shown by the books represents actual loanable funds, is a 
false position, for a daily average balance usually contains 
items taken for cash that are outstanding in the process of 
collection; and also no allowance has been made for the 
twenty-five per cent, reserve. 

"In the following example 'B' all the direct cost of labor 
will be charged to each of the 'labor' or 'items' departments, 
so that the lost time unaccounted for above may be included. 
Dividing the total cost of labor charges to each of the 'items' 
or 'labor' department by the number of items handled in 
each department during the period will give the unit of cost 
for each item on the basis of direct expense only. 

EXAMPLE "B". 

A More Careful Analysis of the Facts. 

Daily average balance $1,000,000 

Less average amount in transit 200,000 

$800,000 
Less 25% reserve 200,000 

Actual usable balance 600,000 

Earning at average 4y 2 % on $600,000 $27,000.00 

270,000 items receiving teller at .004c= 1,080.00 

202,000 items clearing house at .0011 = 222.20 

35,000 items check desk at .0075 = 265,50 

32,000 items city collections at .01 = 320.00 

1,000 items transit desk at .005 = 5.50 

104,000 items from clearing house at .0075 = 780.00 

« $2,673.20 

Value of the account for year $24 326.80 



554 THE PRACTICAL WORK OF A BANK 

"In the foregoing example 'IV the direct cost of labor 
alone has been charged to each department, eliminating the 
indirect charges. The unit of cost of each item in each dif- 
ferent department has been found by dividing the direct ex- 
penses charged to each department by the number of items 
handled. Multiplying the number of items handled for the 
account in each department by the unit of costs for items of 
its class, will give the total cost for all items of that particu- 
lar class. In this example the daily average balance has 
been reduced by $200,000, the average amount in transit, 
and also by a further reduction of $200,000 for the twenty- 
five per cent, reserve. The earning capacity of the account 
in example 'A' was $45,000, no allowance being made for 
transit items, or reserve, while in example 'B' the earning 
capacity was $27,000 after proper allowance has been made 
for transit items and reserve. But this is not the real point 
of difference between the two, for if no actual calculation 
were made to cover transit items and reserve in example 'A' 
a certain mental* allowance would be made for same. The 
real difference between example 'A' and example 'B' is that 
the cost of handling items for the account is more than 
double in the latter where the unit of cost per item is used 
as a basis, than in the former where the approximate aver- 
age time of clerk hire is used as a basis. 

"In neither of the foregoing examples has attention been 
paid to the apportionment of the overhead charges, the fixed 
charges, or the administration expenses that are incurred in- 
directly. Many other important elements have also been 
purposely omitted from examples 'A' and 'B' in order to 
emphasize their value and importance. These elements 
should be included in any analysis that is to be complete 
and accurate. These elements are cost of administration ex- 
penses attached to the handling of the dollars of balance, in- 
terest paid to the depositor on his average balance, special 
work and specific expenses. 

"In the following example 'C all the scientific principles 
that have been evolved to date will be used to demonstrate 
the correctness of the theories set forth : 






ANALYSIS OF ACCOUNTS 555 

EXAMPLE "C". 

Application of the Scientific Principles. 

Daily average balance $1,000,000 

Less average amount in transit 200,000 

Net average balance 800,000 

Less 25% reserve 200,000 

Actual usable balance $600,000 

Earning an average of 4y 2 % on $600,000 27,000 

Exchange received 20 

Total earning capacity $27,020.00 

Cost of handling: 

270,000 items receiving teller at .008 $2,160.00 

202,000 items clearing house at .0022 444.40 

35,000 items check desk, in, at .015 525.00 

32,000 items city collections at .02 640.00 

1,000 items transit desk at .011 11.00 

104,000 items check desk, out, at .015 1,560.00 

Currency, one man 1 hour daily 150.00 

Special work 43.81 

Clearing House 36.84 

Exchange cost 5.00 

$1,000,000 daily average balance, cost of administration.... 5,000.00 

2% interest on net average balance of $800,000 16,000.00 

$26,576.05 



Net value of the account for year $443.95 

"It will be noticed in example : C the unit of cost of 
handling an item is twice the amount of the corresponding 
unit of cost as shown in example 'B', for the reason that the 
direct expenses together with a proper proportion of the 
overhead charges have been added; that is, the direct and 
also the indirect expenses are included in the unit of cost in 
example 'C\ Further it will be noticed example 'C con- 
tains other expenses and outlays that do not appear in either 
of the other two examples, 

"In the scientific analysis 'C it is intended to include 
every possible cost attached to an account, and also to show 
every earning made by an account ; therefore, certain factors 
that have a prominent place in the accurate analysis 'C have 
no place in either of the other examples- -'A' and 'B'. 

"In comparing the earning capacity of the three methods 
of -analysis it would be unfair to assume that in example 
'A' $45,000 would actually represent what the account 
earned, for certain mental allowances are to be made for 
outstanding cash in transit and also the twenty-five per cent, 
reserve. The important thing is to definitely state the daily 



556 THE PRACTICAL WORK OF A BANK 

average balance properly reduced by these two factors in 
the analysis, as is done in the case of examples 'B' and 'C\ 
It is also important to make allowance for the exchange 
earnings, even though the amount appears to be small. 

"There are two elements of expense in example 'C: the 
cost of administering the dollars of balance, $5,000, and the 
interest paid to the depositor, $16,000. While some mental 
allowance has been made for these items in example 'A' and 
example 'B' they do not definitely appear on the analysis 
sheets now in common use. In connection with the interest 
paid by banks to their depositors it is well to note that banks 
pay interest on the net average balance, that is, the net aver- 
age balance before it has been reduced by the twenty-five 
per cent, reserve which has to be kept idle and unproductive 
in the vault; furthermore, the banks pay a flat rate of two 
per cent, rather than a graduated rate that bears some rela- 
tion to the fluctuating earning rate." 

"By comparing the final results of the three different 
methods it will be seen how easy it is to be misled in guess- 
ing at the value of an account. In example 'A' the cost of 
handling the account by averaging clerk hire, was $1,199.50; 
in example 'B' by using the direct elements of expense only, 
the cost was $2,673.20; while in example 'C, where both 
direct and indirect elements were employed, the cost was 
$5,576.05. Assuming that the mental allowance of interest, 
$16,000, and cost of administration balance, $5,000, were 
equal in all three examples the application of the scientific 
principles of cost accounting, which includes all elements of 
cost earning, is the only accurate method of measuring the 
value of an account. 

"In order to arrive at the different units of cost, both the 
unit of cost on the basis of items to be handled, and the unit 
of cost on the basis of dollars to be administered, it is neces- 
sary to separate the two different classes of expense appli- 
cable to each. The total gross operating expense is a cer- 
tain amount which includes every outlay of every character, 
the proper proportion of which must be borne by the labor 
or 'items' departments, on the basis of items to be handled; 
and the proper proportion must also be borne by the earn- 
ing or administration departments on the basis of dollars of 
balance, left on deposit, to be administered. The accounts 
must bear the total gross operating expenses evenly appor- 



ANALYSIS OF ACCOUNTS 557 

tioned, both on the basis of balance loaned and on the basis 
of items handled. 

"Reducing the total gross operating expenses by the 
amount of direct expense charged to the different 'items' 
departments, and distributing it among the 'items' depart- 
ments, will leave an amount of general operating expense. 
Beside the direct expense charged to 'items' departments a 
proper proportion of indirect expense must also be charged 
to cover 'overhead' and administration cost; then according 
to the theories set forth in the last paper, the proportionate 
rates which the direct expense of all the 'items' departments 
bear to the general operating expenses (that is, the total 
gross operating expenses after they have been reduced by 
the direct expenses charged to the items departments) , is the 
amount to be further deducted and distributed proportion- 
ately among the different 'items' departments for the indi- 
rect expense. 

"To illustrate: In the receiving teller's department there 
is a direct expense of, say, $10,000 or $15,000 which gives a 
unit of cost in example 'B' of .004 per item. However, to 
this direct expense must be added the proper proportion of 
indirect expense, say, in this case, some $10,000 or $15,000 
more ; these direct and indirect expenses added together and 
divided by the number if items handled, gives the unit of 
cost in example 'C .008, or twice the amount of the corre- 
sponding unit of cost in example 'B'. The same rule holds 
for all the other items departments. 

"The remainder of the general operating expenses after 
direct and indirect expenses of 'items' department have been 
deducted, is the net general operating expense or cost for 
administering the dollars of deposit. Dividing this amount 
by the daily average of all deposits will give the unit of cost 
on one dollar, in this case .005." 

Like all other matters of arithmetical calculation cost 
accounting can be carried to such an extreme that only a 
mathematician can understand the process, but all will agree 
that it is worthy of the study the problem invites. It is bet- 
ter to be too analytic than too lax ; to be over-technical than 
careless. Mr. W. A. Buckley, assistant cashier of the 
Fourth Street National Bank of Phila., Pa., has given close 
and careful study to the question, and approaches the sub- 
ject with an eye to minutiae that is admirable. By reason of 



558 THE PRACTICAL WORK OF A BANK 

the care, the thought and the scientific results possible in such 
process, the paper read by Mr. Buckley before the conven- 
tion of the American Institute of Banking at Rochester in 
1911 is herewith given in full: 

Cost System Based on Expenses 

"The cost system that should appeal to bankers is one, 
by the use of which, it will not be necessary to make an anal- 
ysis more than once in, say, two years. Such a method 
should necessitate a minimum amount of effort, as the cost 
units once found are practically permanent. 

"The following described method is based entirely upon 
the expenses of the bank, which are separated into two 
classes; those caused by lending funds, and those caused by 
the activity of accounts. 

"If all of the expense caused by an account for one 
month be deducted from its possible gross earning capacity, 
based on the average loanable rate of funds for the month, 
the result will be the net profit. 

"With the method herein suggested, it will be necessary 
to have an analysis card for each account, with space for 
twelve months' figures. The card should show for each 
month the average ledger balance, the average amount of 
out-of-town items in the process of collection, the net work- 
ing balance in bank, the amount of interest paid, the cash 
cost of collecting out-of-town items. In the latter column 
should be entered in red ink the cost of special check books. 
A column should be provided for the cost of administration 
based upon the number of items handled for the account in 
a given month. 

"With the data on the analysis card, the profit on the 
account can be readily ascertained by using the average rate 
per cent, on loans and investments for the month. 

"Illustration: Suppose the data to be as follows: Aver- 
age ledger balance, $10,000; average amount outstanding, 
$2,500; net working balance, $7,500; interest paid, $16.43; 
cash cost of collecting out-of-town items (exchange paid), 
$3.50; average loanable rate on loans and investments, 4.5 
percent, (approximated). 



ANALYSIS OF ACCOUNTS 559 

Average balance $10,000.00 

Outstanding 2,500.00 

Net working balance $7,500.00 

Income on three-fourths of this amount, one-fourth in reserve (reserve 

city basis) at 4.5 per cent, for one month $21.08 

Income from reserve agents at 2 per cent, on one-eighth of the amount 1.54 

§22.62 

Less interest paid $16.43 

Exchange paid 3.50 

19.93 

Profit for month $2.69 

"If a hank collects all of its out-of-town items through 
its reserve agents at par, it is under no expense in this re- 
spect,- except for postage and stationery, and the ordinary 
analysis referred to ahove is unnecessary. Where, however, 
a bank is under expense in collecting any out-of-town items 
deposited, either in exchange charges or in time outstanding 
before returns are received, such items should be subjected 
to an analysis. As nearly all banks make seme attempt at 
an analysis covering out-of-town business, it will not be 
necessary to go into further details. 

"If a bank's accounts were all inactive, the only em- 
ployees necessary would be the officials required by law, 
clerks for the discount, collateral and credit departments, 
together with sufficient office-room for their accommodation, 
a board room, a vault and space for bookkeeping. The 
items of postage and stationery would not be worth consid- 
eration, and the other expenses enumerated above would be 
properly chargeable to the income on loans and investments, 
because it is incurred in the making and caring for loans. 
In addition to the expense of making and caring for loans, 
the handling of cash and time collections deposited, deposit 
tickets, cash and collection letters, the currency received and 
paid, and the checks and drafts paid and charged to ac- 
counts cause the expenses chargeable to administration. 

Analyzing the Expense Account 

"The cost of administration is composed of two elements: 
(a) The expense of lending the money deposited; (b) the 
expense caused by the activity of accounts. If the propor- 
tionate amount of the expense of administration be ascer- 
tained and added to the cost shown by the usual analysis, 
the worth of every account is known. 



560 THE PRACTICAL WORK OF A BANK 

"In order to ascertain the proportionate amount of ex- 
pense chargeable to A and B, it will be necessary to careful- 
ly analyze the expense account for a period of six months, 
and then take the average amount for one month. If some 
expenses are paid annually, only one-half of such sums may 
be included; and if any expenses are heavier in one semi- 
annual period than the other, they should be analyzed for one 
year and then averaged for one month. 

"An approximation should be made of the percentage of 
the floor space used by the several departments to the total 
space occupied, to ascertain the proportionate cost of each 
department for rental. If the bank owns its building, the 
amount at which it is carried on the books, taken at the aver- 
age loanable rate on money during the preceding six months 
should be used for rental cost, taking one month's rental as 
a basis. Banks carrying on their books the amount expend- 
ed for furniture and fixtures should figure the interest on 
such sum for one month. If this has been absorbed in the 
expense account, the amount may be approximated and the 
interest for one month ascertained. 

"Expenditures for new typewriters, listing and adding 
machines and other labor-saving devices, should not be in- 
cluded; but the yearly cost (for one month) of such ma- 
chines should be entered under the salaries of the depart- 
ments using them. The yearly cost is ascertained by taking 
the original price, less the rebate allowed when it is ex- 
changed for a new one, and dividing the amount by the num- 
ber of years the machine can be used. 

"(A) As it is impossible to make and care for loans 
without incurring some expense, it is essential, for the pur- 
poses of analysis, to know the cost of keeping funds in the 
form of loans and investments. To ascertain this cost it will 
be necessary to bring together the expenses of the officials 
who pass upon loans and credits and the discount, collateral 
and credit departments for salaries, surety bonds, rental for 
floor space, stenographic work, luncheons, light, heat, tele- 
grams, telephone service, expressage, postage, stationery 
and sundries. To this amount should be added: Retaining 
fee to counsel, Government excise tax, rental for floor space 
occupied by the board room, vault and corridor space lead- 
ing to the quarters of the officials who pass upon loans and 
credits, compensation to directors (if any), subscriptions to 



ANALYSIS OF ACCOUNTS 561 

various trade organizations, credit bureaus, etc. The total is 
the expense of making and taking care of loans for one 
month. 

"After deducting the various expenses mentioned above, 
the following are found to be chargeable to the activity of 
accounts: Rental for space occupied by departments hand- 
ling items and quarters of the cashier, assistant cashier, ste- 
nographers and audit departments, lobby space used by cus- 
tomers leading to the various departments, stationery 
closets, letter files and lockers; salaries of officers in charge 
of administration, salaries of departments handling items, 
and, in addition, salaries of audit department, stenographers, 
telegraph clerk, telephone operator, day and night watch- 
men, letter filing clerk, messengers and porters; clearing- 
house expenses, luncheons; expense for postage, stationery, 
light, heat, premium on surety bonds of officials and clerks 
named above, telephone service, telegrams, expressage and 
sundries. 

"As the analysis card shows the amounts of interest and 
exchange paid, and cost of special check books, these ex- 
penses should not be included. The following named ex- 
penses are not chargeable to either A or B: State tax; 
properly chargeable to income derived from the capital 
stock. Semi-annual duty on circulation; expressage on cir- 
culation, and other expenses on circulation, all of which are 
properly chargeable to income received on United States 
Government bonds. 

"The cost of clearing-house, Government and other ex- 
aminations should be approximated between A and B. 

"Whether or not certain expenses are chargeable to A 
or B is certainly a proper subject for careful consideration 
and discussion, and in formulating a system for ascertain- 
ing cost-units every bank must decide them for itself. The 
following have not been included under either A or B : Cost 
of analysis department; advertising, and postage used in 
connection therewith; salary and expenses of traveling man; 
losses on loans and fees to counsel (other than the annual 
retainer) . 

" ( A) It is suggested that the expense incurred in mak- 
ing and taking care of loans be considered as a certain per- 
centage of the average loanable rate on funds, and that 
when this percentage is ascertained it be deducted from the 

37 



562 THE PRACTICAL WORK OF A BANK 

rate, using the reduced rate in computing the profit on an 
account. 

"To find the rate per cent, on loans representing the 
expense of making and caring for loans, ascertain the aver- 
age daily balance of loans and investments, not including 
United States bonds and premium on United States bonds 
for a period of six months. Multiply the loan expense by 
twelve (to get the yearly expense). Divide this amount by 
the average daily amount of loans and investments. The 
result will be the rate per cent, to be deducted from the aver- 
age loanable rate for funds. 

"Illustration: Suppose the average loanable rate for 
funds for a given month to be 5.25 per cent, and that for 
the past six months the balance of loans and investments, 
not including United States bonds and premium on United 
States bonds, averaged $18,978,000. Expense incurred in 
lending funds (for one month) is $3,352.78. Multiplying this 
amount by twelve (to get the yearly expense) gives $40,233. 
Dividing this amount by $18,978,000 gives .00212 or .212 
per cent.; subtracting .212 per cent, from the rate for funds, 
5.25 per cent., gives 5,038 per cent., which, therefore, should 
be used as the net loanable rate for funds in computing the 
profit on accounts. 

"This formula apportions the expense on the average 
amount of loans and investments and, therefore, gives to the 
capital stock, surplus and net profits, which are, of course, 
in the form of loans and investments, their proportionate 
amount of the expense incurred. 

"(B) To ascertain the cost units for the various classes 
of items passing through the bank, it will be necessary to 
count the number of items received by the bank for one 
month from each individual and bank account, and the num- 
ber of checks and drafts paid and charged to each account. 

"The analysis of the expense account should embrace a 
thorough examination of the amount expended for station- 
ery, so as to apportion it among the several departments 
handling items. This amount goes into the first element of 
cost (see First Cost) . Stationery used by officials and other 
departments in which items are not handled goes into the 
second element (see Second Cost). 

"As certain expenses are incurred because of individual 
depositors alone, it is suggested, if extreme accuracy be de- 



ANALYSIS OF ACCOUNTS 563 

sired, that they be apportioned only to this class of deposi- 
tors on the basis of the number of items handled for each 
account. In this class of expenses may be mentioned : Rental 
of lobby space used by customers in front of receiving, pay- 
ing and other departments handling business for individual 
depositors only: salaries of clerks at counters in these de- 
partments; cost of stock check-books, deposit- tickets and 
pass-books. 

"When the number of items handled during the month 
has been ascertained, the record will show the number de- 
posited, by each individual and bank account, of each of the 
following mentioned items : City collections, out-of-town col- 
lections, city clearing-house and runners' items, out-of-town 
cash items, and, in addition, the number of checks and drafts 
paid and charged to each individual and bank account. In 
the case of city items (both cash and time) it would be well 
to count separately the clearing-house items, trust company 
items, and other items requiring presentation by the runners. 

"As the figures for any one month will, in the majority 
of cases, be a fair index to the average number of items 
handled for an account, the number of each kind of items 
should be entered on the analysis cards for reference. It is 
hardly practicable to approximate the cost of handling coin 
and currency, and it would be well to assume that every 
account makes deposits and withdrawals thereof in fair pro- 
portion to the number of items deposited. Due allowance 
should be made, of course, for accounts that are exceptions 
to this general rule. As the number of deposit-tickets and 
letters received must necessarily be much smaller than the 
number of items which accompany them, it would likewise 
be well not to compute the cost of these separately, but to 
let it go into the cost of handling the items. 

"If it be desired to know the cost of issuing drafts drawn 
on reserve agents and other out-of-town correspondents, it 
will be necessary to divide the salary of the exchange clerk, 
together with the cost of the drafts, advices and postage 
thereon, into the number issued during the month. Should 
the exchange clerk have other duties, approximate the time 
given to writing drafts and advices. 

"The cost of handling time collections is considerably 
greater than that of cash items, because of the complete 
record that has to be made of the former, the separate en- 



564 THE PRACTICAL WORK OF *A BANK 

tries that have to be made of each time collection in the 
bookkeeping department, tracing, advising payment and 
other details. In the case of city collections there is an ad- 
ditional expense for postage on notices and the cost of tele- 
phone service, which materially increases the cost. 

"It will be found that it costs more to handle items de- 
posited by individuals than by banks, that out-of-town cash 
items are more expensive than clearing-house items; that 
trust company items are more expensive than clearing-house 
items; that other runners' items are much more expensive 
than trust company items ; that the drafts paid and charged 
to accounts are considerably more expensive than out-of- 
town cash items, and that time items are from six to eight 
times as expensive as out-of-town cash items. 

"In making up the cost unit it must be borne in mind 
that it consists of five elements: First, the expenses of the 
several departments that handle the items; second, the ex- 
penses of the officials and clerks who do not directly handle 
the items, and sundry other expenses; third, clearing-house 
expenses; fourth, postage; and fifth, cost of telephone ser- 
vice. 

"First Cost. — In order to ascertain the first cost the fol- 
lowing departments must be considered, because they direct- 
ly take care of the items : Paying, receiving and note tellers, 
runners, transit, out-of-town collection, city collection, in- 
dividual ledger and bank ledger. 

"From the analysis already made of the expense account 
the cost of each of these departments has been ascertained 
for salaries, premiums on surety bonds, rental of adding and 
listing machines and typewriters, stationer}'- and rent. It 
will not be necessary to ascertain the cost per item for these 
separately, as by adding them the net result is obtained by 
a single operation. 

The Cost of Handling an Item 

"To ascertain the cost of handling an item as it goes 
through the bank, make a record of the number of items 
handled by each department. As all items are handled more 
than once, it is necessary to make a record of them in every 
department through which they pass; and, if they are 
handled twice in any department, the number so rehandled 



ANALYSIS OF ACCOUNTS 565 

must be set down twice. This must be done so that the 
class of items handled twice may bear its proportionate 
amount of expense to the department. Divide the total ex- 
pense of each department by the number of items handled. 
The result will be the cost in the department for each sepa- 
rate item. The runners collect items drawn on trust com- 
panies, etc., not represented in the clearing-house, and other 
items drawn on individuals, firms and corporations. As 
these latter items take up a considerable portion of the run- 
ners' time, an approximation of the time given to handling 
such items should be made so that the proper cost unit for 
this class can be ascertained. 

"The total cost of each class of items is made up of the 
expense incurred in the handling of them in the several de- 
partments through which they pass. It is necessary, there- 
fore, to multiply the cost unit in each department by the 
number of items in each class which it has handled during 
the month. When this has been done the several costs of 
each class of items are to be brought together to ascertain 
the total cost. Divide the total cost b} r the total number of 
items in the class to ascertain the cost of each separate item 
in the particular case. 

"Illustration: Suppose the receiving department 
handles during the month the following: Deposited by in- 
dividuals: 53,866 clearing-house items, 70,949 runners' 
items; 113,517 out-of-town cash items. Deposited by banks: 
53,185 clearing-house items; 49,238 runners' items; 110,527 
out-of-town cash items; total number of items handled, 451,- 
282. The clearing-house items are taken care of in the re- 
ceiving department. This brings the total number of items 
handled up to 558,333 (451,282 plus 53,866 plus 53,185). 
If the salaries paid to this department amount to $765, the 
premium on surety bonds to $32, the rental value of adding 
machines to ^>56, the rental value of floor space to $103 and 
the stationery cost of $32, the total expense is $988. Divid- 
ing the expense by 588,333 gives the cost of each item, name- 
ly, $0.001769. Multiplying the number of items in each 
class by the cost unit gives the cost of each class in the de- 
partment as follows: Deposited by individuals, clearing- 
house items, $95; runners' items, $126; extra cost of 
handling clearing-house items, $95; out-of-town cash items, 
$201. Deposited by banks, clearing-house items, $94; run- 



566 THE PRACTICAL WORK OF A BANK 

ners' items, $87 ; extra cost of handling clearing-house items, 
$94; out-of-town cash items, $196; total, $988. 

"It will be noticed that the cost of the clearing-house 
items is made up of the cost of the first handling and the 
second handling. The analysis of the runners' department 
will give the cost of handling the runners' items in that de- 
partment. The analysis of the transit department will give 
the cost of handling the out-of-town items in that depart- 
ment. As an illustration, the cost of out-of-town items de- 
posited by individuals will be taken not only for the first 
cost, but for the several costs making up the total expense. 
Suppose the cost in the transit department is $538. As the 
cost in the receiving department is $201, the total cost is 
$739, or $0.00651 per item. 

"Second Cost. — To get the cost per item in this class 
divide the total number of items of all classes handled dur- 
ing the month into the total of the following expenses : Sala- 
ries of officials and clerks who do not directly handle the 
items, which will include salaries of the audit department, 
messengers, porters, day and night watchmen, stenograph- 
ers, telegraph clerk and filing clerk, rental value of the ex- 
ecutive offices, lobby, stenographers' and audit departments, 
letter files, lockers and stationery closets, rental value of add- 
ing, listing machines and typewriters ; luncheons, light, heat, 
premium on surety bonds, telegrams, expressage, sundries 
and stationery used by officials and clerks who do not direct- 
ly handle the items. 

"Suppose the cost per item to be $0.006309. 

"Third Cost. — Clearing-house expenses should be appor- 
tioned to checks and drafts paid and charged to each ac- 
count and to city items only. To get the cost per item, di- 
vide the clearing-house expenses by the number of city cash 
and time items, and checks and drafts paid and charged to 
each account. 

"There is no expense for out-or-town items in the third 
cost. 

"Fourth Cost. — From the amount of postage properly 
chargeable to administration expenses, deduct the amount 
used by the city collection and runners' departments in mail- 
ing notices concerning notes and drafts, which should be 
added to the cost of city collections and runners' items. Into 
the net amount of postage divide the number of out-of-town 



ANALYSIS OF ACCOUNTS 567 

collections and out-of-town cash items handled. The result 
will be the cost per item for postage in these respective 
classes. 

"Suppose the cost of out-of-town cash items to be 
$0.003049 per item. 

"Fifth Cost. — This embraces telephone service, includ- 
ing salary of operator. As the cost of out-of-town calls 
made for customers and correspondents is usually charged 
to their accounts, such part of the expense should be omitted. 
The remaining portion of cost of telephone service should 
be apportioned to city collections, city cash items and drafts 
and checks paid and charged to each account. Approximate 
the number of telephone calls made during the month in con- 
nection with city collections, runners' items and drafts and 
checks paid, and apportion the cost thereof to the respective 
classes of items. Apportion the remaining cost to city cash 
items. To get the cost per item, divide the number of items 
in the class into the cost of service. 

"There is no expense for out-of-town items in the fifth 
cost. 

"If it be determined to apportion to individual depositors 
alone the salaries of the clerks at the counters in the receiv- 
ing and paying tellers' departments, the rental value of the 
lobby space used by customers and the cost of stock check- 
books, pass-books and deposit-tickets, there will be a cost per 
item for the expense. 

"Suppose the cost per item to be $0.003187. 

"The five costs enumerated, and the extra cost noted 
above, should be brought together and the total will be the 
cost of handling each item in each class. 

"Illustration: Cost of out-of-town items deposited by 
individuals : 

First cost $0.006510 

Second cost 0.006309 

Third cost 0. 

Fourth cost 0.003049 

Fifth cost 0. 

Extra cost 0.003187 

Total cost per item $0.019055 

"To find the cost of an account for the month, multiply 
the number of items in each class handled by the proper cost 
unit and bring together. The total is the cost of adminis- 
tration for the account. 



668 THE PRACTICAL WORK OF A BANK 

"It is but fair to assume that most accounts deposit, on 
the average, about the same number of items every month, 
and for this reason it is not necessary to ascertain the admin- 
istration expenses oftener than once every year or two. If 
there be a change in the character of the account, the analy- 
sis department should make a recount of the number of 
items handled. The same method can be used (with mod- 
ifications, of course) by State banks and trust companies. 
In the case of trust companies, however, the analysis would 
apply to the banking department only. 

"While at first it may seem difficult to make an analysis 
on the lines outlined, it will be found upon examination that 
the procedure is not involved and will be very interesting 
and the results obtained of great importance to any bank, as 
the worth of each account will be definitely known." 

Note — Mr. Buckley's paper has, in substance, appeared in the Banking Law 
Journal and Journal of American Bankers Association. Printed here by cour- 
tesy of the author. Mr. Ensell's matter revised and arranged by himself. — W. H. 
K., Jr. 



CHAPTER XVII. 
FOREIGN AND DOMESTIC EXCHANGE 

It would be quite impossible in the scope of this work to 
deal extensively or adequately with the subject of foreign 
exchange. Therefore, but a brief resume of the subject can 
be undertaken, covering (a) the origin of foreign exchange; 
(b) the instruments; and (c) the general principles of for- 
eign exchange transactions. 

In an opening chapter it was said that trade is merely 
the exchange of commodities for commodities. This is true 
both in domestic and foreign affairs. One section sells an- 
other section, and one country another. The South sells 
New England cotton and buys manufactured goods. The 
West sells the East meat, fruits and grain, and buys all 
sorts of manufactured goods. 

Likewise in the affairs between nations. France sells the 
United States silks, jewels, wines, etc.; England, the prod- 
uct of her mills; Germany, dyestuffs, toys and articles pe- 
culiar to German manufacture. All three nations take in 
exchange wheat, cotton, meats, raw material of various 
kinds, metals, and manufactured goods. But inasmuch as 
the amounts traded in do not balance, one country buying 
more than it sells, there is a difference arising that must be 
settled in money. If the merchants of England bought of 
the merchants of the United States, and the American mer- 
chants bought of English houses an equal amount of goods, 
the merchants of England could pay one another and the 
merchants of America likewise, and there need be only a 
transfer of debts to affect the balance ; such a course obtains 
only in a limited sense and by a complicated process, but 
the principle is easily understood. 

Settling Debts Without Money 

The method by which debts are settled by offsetting one 
against the other is simple. If two men owe each other cer- 
tain amounts, instead of each paying the other what is due, 
they meet and adjust the difference; they have " cleared' ' 

569 



570 



THE PRACTICAL WORK OF A BANK 



their debts and settled the balance. Likewise several men 
may settle their differences by a few payments in cash. 
Debts are settled by mutual cancellations. 

To illustrate how an international debt is cancelled with- 
out the use of money, take a simple proposition. Let us sup- 
pose that a New York merchant sells to an English mer- 














SKfH'1 oCc 



(feuy/C^M^C 



G^^^fo&vt+ttJPGr* 



Fig. 7. 
bill of exchange (in duplicate) 

chant $1,000 worth of goods. An English merchant has 
sold a New York merchant a bill of goods likewise amount- 
ing to $1,000. Payment for these debts might be made by 
the Englishman sending gold to New York, and likewise 
New York sending gold to England. But why this double 
trip across the Atlantic? Why not let the merchants in 
New York settle with each other, and the English merchants 
settle with each other and effect the same result? Therefore, 
the first mentioned New York merchant draws an order on 



FOREIGN AND DOMESTIC EXCHANGE 571 

his English debtor and takes it to the other New York mer- 
chant, who is in debt to an Englishman. The debtor mer- 
chant pays the creditor merchant on this side. The bill is 
sent to the creditor merchant on the other side who collects 
from the debtor merchant there, and both transactions are 
closed. Thus, the two debts have been paid without ship- 
ping the coin. Upon this simple principle of offsetting debt 
against debt depends all exchange operations, foreign and 
domestic. Of course, direct dealing does not so obtain, but 
through the medium of banks and foreign exchange houses, 
essentially the same process takes place; the instruments in 
one country being gathered and sent to the other for collec- 
tion and credit, whatever balance remains being adjusted 
from time to time in gold. 

Origin of Foreign Debts 

Debts created abroad arise from three main sources: (a) 
Goods purchased abroad; (b) insurance and freights paid 
by American merchants to foreign houses. England being 
the great insurance and carrier nation of the world, the 
freights carried in English vessels are one of the principal 
items in the balance against us; (c) securities held abroad 
or those sold by foreign holders) : (d) travelers' expenses 
S9i^unD9s Suun^ui osp?) pred aq ^snui ;s9J9^ut ipiqM uodn 
while abroad, which are enormous. 

The "balance of trade" is the net amount due to or from 
another country, and depends upon the volume of trading 
one country does with another. The nation that buys more 
than it sells — owes more than it has due to it — is the debtor 
nation, and the trade balance is against it, and must settle 
in money at the will of the creditor. 

The sources of foreign exchange are: (1) Merchandise 
shipped abroad against which drafts are drawn and sold in 
the exchange market; (2) securities sold, the seller drawing 
on the buyer; (3) foreign money loaned in this market, the 
operation consisting of drawing drafts on the lender; (4) 
finance bills, arising from the banker abroad allowing a 
banker here to draw on him, the drafts being sold and pro- 
ceeds used in financial transactions until the draft is due. 1 

i Elements of Foreign Exchange — Escher. 



572 



THE PRACTICAL WORK OF A BANK 



Whenever a consignment of merchandise goes abroad, as; 
a rule, a draft is drawn on the buyer by the seller, and sold 
in the market, the seller coming into immediate possession 



tar— -;■ ' "...::■„." 



fill 



E 



rsr.fx^r'i-^.-zi.-^^ 1 






-_: 










IHH 



LETTER OF CREDIT 



of his money. The trade movements, therefore, regulate the 
number and volume of these bills, since they are as volumi- 
nous as commerce is brisk or dull. When ocean transit op- 
erations are at a practical standstill, as obtained during the 



FOREIGN AND DOMESTIC EXCHANGE 573 

early part of the present war, no bills arise, for no goods 
move, and rates are, therefore, high. 

Large stocks of bonds and securities are held abroad, the 
European nations being large investors in American securi- 
ties. When a transaction is consummated, the securities are 
forwarded and draft attached. And the movements of secu- 
rity holdings, therefore, affect the supply of bills. 

In making loans, bankers do not send the cash, but al- 
low their correspondents to draw on them. Thus, if an Eng- 
lish bank were to lend a million dollars in this market, it 
would authorize its representative to draw on it, and these 
drafts are sold and the proceeds used as agreed upon. Take 
an actual case. A wholesale house desires a loan, say, of 
$50,000. It deposits with its New York banker security in 
the form of its bills receivable, and the banker draws his 
draft on the English house, sells it and turns the proceeds 
over to the borrower. When rates abroad are low, this may 
be a profitable form of borrowing. If money rates are high 
in New York, the foreign bankers may allow their corre- 
spondent to draw on them for money to loan out for joint 
account, and this gives rise to what is called "finance bills." 



The Demand for Bills 

The demand for instruments of exchange arises from 
the following sources: (a) The payment for imports; (b) 
payment for securities purchased by us in Europe; (c) re- 
mittances on account of interest and dividends on stocks 
and bonds held abroad; (d) remittances for freight and in- 
surance due to foreign companies; (e) tourists' expendi- 
tures; (f) payment for short-time and other loans that are 
maturing. 

The most important item is the payment for merchandise 
purchased abroad. As each shipment is paid for by draw- 
ing a bill of exchange, these instruments come into the mar- 
ket in large numbers and for large amounts, and are a 
source of constant supply of bills. 

As interest is due and dividends are declared, holders 
abroad must be placed in funds, and, therefore, a demand 
arises for a bill for the purpose of remitting. Likewise pur- 
chases of securities. Whenever these are purchased abroad, 



574 



THE PRACTICAL WORK OF A BANK 



whether our own or foreign issues, a demand arises for a 
bill of exchange with which to make payment. 

Many of the large insurance companies are foreign cor- 
porations, doing business in this country amounting to mil- 



CreditNo ^JjLi- 

Jjji€MJ-C 



Guaranty Trust Company of New York 

Foreign Department 







New York,. 



DEC Z 8 1914 






Gentlemen: 

We hereby authorize you to value on 
for account of 




up to an aggregate amount of 

available by your drafts at^A^y&^kUd^./^. 

against shipment of ..MfrMM^ TTTM ' 

Insurance l^.fJU<ji / Wl4 4?/M<.%i/?Jl/. 

Bills of Lading for such shipments' must 
of New York, unless otherwise specified jn this 



ty Trust Company^of^Jqew York, >Jew York, 

, iiAac'-. 

C 



CONSULAR INVOICE AND ONE 
DRAFTS DIRECT TO GUARANTY TRUST CO 

The remaining docume: 
New York. 



The amount of 
back hereof. 



We hereby agree 







out to the order of the Guaranty Trust Company 



MUST BE SENT BY THE BANK OR BANKER NEGOTIATING 
NEW YORK. NEW YORK. 

mpany the drafts drawn on Guaranty Trust Company of New York, 



egotiated, together with date of negotiation, must be endorsed on 



bona fide holders that all drafts drawn by virtue of this Credit and in 



accordance with the above stipulated terms shall meet with due honor upon presentation at the Officeof 
Guaranty Trust Company of New York, New York, if drawn and negotiated prior to -jr^Mn^.^^.J.S^M /5 

Guaranty Trust Company of New York, ^.^ 



N. B. Drafts drawn under this Credit must state 
that they are "drawn, under Letter of 
Credit No. 
Dated. 






are "draw 

» VUL 



ADVICE OF LETTER OF CREDIT 



lions yearly. The premiums must be remitted to the home 
office, and hence a demand for bills arises. 



Forms of Bills 

The following are the principal forms of bills: (a) Com- 
mercial long bills — bills drawn by merchants upon buyers 
abroad, through bankers, at thirty, sixty or ninety days 



FOREIGN AND DOMESTIC EXCHANGE 575 

sight. If drafts accompany, they are "documentary bills"; 
if not, they are "clean." 

Thus, a cotton merchant in Texas sells a consignment of 
cotton to a Liverpool merchant, under arrangement that the 
Texas merchant is to draw on a Liverpool bank at sixty 
days. The Texas merchant receives a bill of lading from 
the railroad company which is a "through bill," and takes 
the cotton into the steamer. Draft is drawn and the bill of 
lading attached. Insurance is also effected and other docu- 
ments, such as inspection certificate, weighing certificate, 
etc., attached, completing the papers. The draft will be 
taken to the Texas bank, credited to the depositor, and sent 
to New York for sale in the exchange market. 

Let us suppose the rate is 4.86, and the draft is for 
£1,000. The Texas bank will have credit for $4,860. The 
New York bank may charge a commission for buying the 
draft, or make allowance in the price; but it gets its profit. 
The bill is sent by the first steamer to the bank drawn on 
for acceptance. If the documents are to be released upon 
acceptance, such will be the case; if only upon payment, the 
draft will have to be paid before documents are delivered. 
As soon as the bill is accepted, it is sold and proceeds 
credited to the New York bank. Thus, we have an "accept- 
ance bill," and a "payment bill." 

(b) Clean bills — drawn for the purpose of transferring 
funds from place to place and no documents accompany; 
(c) drafts drawn against securities, the securities accom- 
panying; (d) bankers' checks, which are merely bankers' 
orders on their foreign balances, as domestic exchange is the 
result of bankers' checks on their reserve balances; (e) 
finance bills, used in lending and borrowing operations. 

How Exchange is Quoted 

Foreign exchange is drawn on three principal points: 
London, Paris and Berlin. Drafts on London are quoted 
at so much a pound Sterling, and progress by 5/100 of a 
cent a pound. Thus, $4.8605; $4.8610. Drafts on Berlin 
are quoted at so many American cents for each four marks. 
Thus, 95 1/8 means that 95 1/8 cents must be paid for four 
marks. These quotations progress by sixteenths. Thus, 
95, 95 1/16, 95 1/8, 95 3/16, etc. The custom is fixed, but 



076 THE PRACTICAL WORK OF A BANK 

it would seem to be more reasonable to quote a mark at so 
many American cents; but the above process is the rule. 

Drafts on Paris are quoted at so much French money 
for an American dollar. Thus, 5.18 1/8 means that that 
many francs may be bought with an American dollar. 
These quotations progress by 5/8 of a centime, thus: 
5.18 1/8, 5.18 3/4, etc. Thus, when exchange on Paris is 
high a dollar will buy less francs, and when cheap, more. 

The Basis of Exchange 

The basis of exchange dealings is the mint par of ex- 
change, which is the price of the gold unit of one country 
expressed in money of the other. Thus, the gold unit of 
England is the pound Sterling. How much is the gold in 
the pound Sterling as expressed in American money? 
$4.8665 — meaning that the latter amount of dollars and 
cents will buy at any United States assay office exactly as 
much gold as there is in the pound Sterling. And $4.8665 
England. 

is the mint par of exchange between this country and 
don, it would cost $4.8665 to buy the gold to settle. Then 
it would have to be shipped, insured, interest lost while in 
exchange. Thus, if a debt of one pound were due in Lon- 
at this rate, for many elements enter to affect the price of 

This does not mean, however, that drafts are always sold 
transit, etc., so that you might be willing to pay more than 
that in order to avoid the shipping of the gold. You would 
pay, in other words, more than the mint par to someone who 
had an order on some London merchant for sale. You buy 
the order, send it to your creditor, he presents it and gets 
the money and the transaction is closed. 

If there were many who wanted to settle debts in Lon- 
don, they might bid for the bill and run the price up; if 
there were many bills, but few takers, the price would fall, 
the law of supply and demand regulating the price at which 
they can be bought and sold. 

Causes That Affect Exchange Rates 

The causes operating to raise or lower rates are due to 
the following: (a) Large imports or exports which require 



FOREIGN AND DOMESTIC EXCHANGE 577 

bills to make payment; (b) purchase by us, and sale by 
Europe, or vice versa, of stocks and bonds, which must be 
paid for; (c) maturing obligations which must be met; (d) 
low money rates here and high abroad, or vice versa, mak- 
ing a demand for bills by which to send funds for invest- 
ment. 

Aside from business obligations which must be settled, 
there is always investment funds seeking profitable employ- 
ment. When money is low in New York and a drug on the 
market, and demand is brisk in London, banks here will have 
a call for exchange in order to place the funds abroad; and 
conversely if money rates are high here and low abroad, for- 
eign interests will desire to place money in this market and 
a demand for bills will arise. 

But whatever the cause, the bill finds its way into the ex- 
change market and is bought by a bank or trust company 
through the foreign exchange department, and a simple 
illustration will suffice to show the operation of an importa- 
tion of goods. 

Imports 

Inasmuch as every shipment of merchandise in or out 
of the country involves a transaction in foreign exchange, 
the commercial credits thus arising are important. These 
credits are of two kinds: credits for import purposes and 
credits for export purposes. 

Let us assume that a merchant in New York dealing in 
Japanese ware has arranged a purchase with a merchant in 
Japan, either by cable, by mail, or by representative. Hav- 
ing made the arrangements as to terms, the merchant goes 
to his banker and arranges to finance the operation. He 
places full details before the banker, who issues a letter of 
credit. The letter of credit will contain information as to 
terms, time to run, articles to be shipped, insurance, etc., and 
will authorize the shipper to draw on some London bank 
which will accept the draft when presented. 

Inasmuch as the business of financing the foreign trade 
of the world is largely done through London, the credit will 
be arranged through a London bank. This business is the 
outgrowth of years of world-wide dealings and London 
banks are known the world over. They have established 
reputations and banking connections in every part of the 

38 



578 THE PRACTICAL WORK OF A BANK 

globe. London is not only the money center of the world, 
but the world's great trading center. To it comes trade 
from all the world, and by virtue of its place in the world's 
financial affairs, London has become the clearing-house for 
the world's transactions, and a London acceptance will be 
good anywhere. 

The merchant in New York, therefore, arranges with 
his bank for a London acceptance, giving security or not, 



TRUST RECEIPT. 



Received from The Guaranty Trust Co. of New York the following goods 

and merchandise, their property, specified in the Bill of Lading per S. S. , ,...., m — ^»^^, 
Dated „_.._ _« _marked and numbered as follows: 



and, in consideration thereof, j — — 1 HEREBY AGREE TO HOLD SAID GOODS IN TRUST for 
i we > 

them, and as their property, with liberty to sell the same for their account, and further 

agree, in case of sale to hand the proceeds to them to apply against the acceptances of 

The Guaranty Trust Co. of New York on j -^- [ account, under the terms of the 

l our ) 

Letter of Credit No. issued for j — — j account and for the payment of any 



other indebtedness of i — j to THE GUARANTY TRUST Co. OF New York. 



mine ) 
ours 

The Guaranty Trust Co. of New York may at any time cancel this trust and take 
possession of said goods, or of the proceeds of such of the same as may then have been sold, 
wherever the said goods or proceeds may then be found and in the event of any suspension, 

or failure, or assignment for the benefit of creditors, on \ — — j part, or of the non-fulfill- 
ment of any obligation, or of the non-payment at maturity of any acceptance made by 



me 

- t unaer saia 



under said credit, or under any other credit issued by THE Guaranty Trust Co. 



of New York on 

obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon (with or 



without notice) mature and become due and payable. The said goods while in 



my 
ayaoie. ine saau gouus wnne in i ■ 

hands shall be fully insured against loss by fire. 

Dated, New York City, , „ 19 

(Signed) 

£ - .-... , = Stg. 



TRUST RECEIPT 



FOREIGN AND DOMESTIC EXCHANGE 579 

as his credit may require. The London bank will be ad- 
vised of the open credit, and the letter of credit will be sent 
to the Japanese merchant as authority to draw on the Lon- 
don bank. The shipper draws the draft, attaches insurance 
certificate and bill of lading, which is so worded as to make 
the merchandise deliverable only to the banker's order in 
New York. This is his protection. The letter of credit is 
sent in duplicate to the London bank for its guidance when 
the draft is presented. 

The draft with bill of lading, certificates, etc., attached 
form one complete set of papers. The Japanese merchant 
is now in position to sell his draft, for it will be accepted in 
London, and his local bank will buy it from him at current 
rates. 

The merchandise is en route to New York, and the 
papers on their way to London. When the papers are pre- 
sented to the London bank they will be compared with the 
duplicates sent in advance from New York, and if proper 
in form, the draft will be accepted and returned to the pre- 
senting bank, which will sell it in the money market, and 
credit proceeds to its Japan correspondent. The papers 
in the transaction are then forwarded to New York, arriv- 
ing before the merchandise, as a rule. 

The goods arriving in New York are at the disposal of 
the merchant, but stand in the name of the bank and can- 
not be had until the bill of lading is presented, properly 
endorsed, to the carrier. The banker, however, wants some 
assurance of getting the money he will have to advance to 
London to meet the acceptance when due, as agreed when 
the credit was opened. 

He, therefore, surrenders the bill of lading, and in its 
place takes a "trust receipt," which in substance agrees that 
the title to the goods is to remain in the bank, and proceeds 
when collected are to be delivered to the bank. The bank 
also reserves the right upon due cause to cancel the trust, 
and take possession of the goods or their proceeds wherever 
they may be found. 

The term of credit being about to expire, it becomes 
needful that the bank in New York be placed in funds to 
meet the acceptance which is coming due in London. Sev- 
eral days prior to the maturity of the acceptance, the New 
York bank will present its memorandum to the buyer, with 



580 THE PRACTICAL WORK OF A BANK 

request for funds to meet the London acceptance; and pre- 
suming the terms to have been four months, the buyer has 
had that time in which to turn the goods into money. 

The buyer pays the banker the amount necessary to pur- 
chase a draft on London, and from the amount so received 
the bank will buy a draft on London payable on demand, 
and forward to London in time to meet the acceptance. The 
operation is then closed. No money has been put up ex- 
cept in the London money market. The bank in New York 
advanced none ; the buyer had four months to turn his sales ; 
from the sales he paid the bank, and from the amount so 
paid the bank purchased an instrument to cancel the debt 
due in London; and so without money, but using only credit 
and banking machinery, an international transaction has 
been carried through. The New York bank received a com- 
mission for its services; the London bank for its acceptance, 
and the transaction is satisfactory to all. 

The purchaser gets his money from the sale of goods; 
the banker gets his money from the buyer here; the Lon- 
don bank from the New York banker; but where does the 
money come from for the seller? From his bank. But 
where does that bank get its funds? It does not get funds, 
but a credit in London, against which it sells its bankers' 
draft. 

When the draft went to London, the proceeds were 
credited to the Japanese bank, and against the credit so es- 
tablished, it could draw its bankers' time or demand drafts, 
for cash deposited with it. The only one actually out of 
funds during the period of credit was the bank or individual 
buying the draft in London, the proceeds of which were 
placed to the credit of the bank in Japan. These are the 
essential elements of foreign exchange, elementary and eas- 
ily understood, but complex and often confusing in their 
detailed operations. 

Exports 

In selling a consignment of goods abroad the reverse 
process obtains, as was illustrated in the case of the Texas 
merchant above. The buyer here draws on London and sells 
the draft to an American bank, which will forward as did 
the Japanese bank to London for acceptance. In exports it 
is necessary to have the documents complete so that the bill 



FOREIGN AND DOMESTIC EXCHANGE 581 

will be accepted upon arrival. These are: (a) The bill 
itself, properly drawn in duplicate; (b) the bill of lading, 
sometimes issued at the place of origin and which carries the 
consignment through from the railroad to the steamer and 
to the foreign port; (c) the insurance papers; and if grain 
or cotton (d) an inspection certificate. With these in hand 
the bill is readily salable in the foreign exchange market at 
the current rates. 

For a foreign exchange transaction, it becomes impor- 
tant to know: (a) That the bill of lading is genuine and 
the goods in transit; and this is now assured by virtue of 
the frauds that have been perpetrated in this line, and from 
which have resulted better and more careful methods as to 
safeguarding the issue of bills of lading; (b) that the 
drawee is responsible and will accept when the papers are 
presented, and that this acceptance will be equivalent to pay- 
ment; (c) the class of goods. If they are staple, they may 
be sold even though the transaction is not consummated; 
but if otherwise trouble may be experienced in turning the 
goods into money ; and lastly, the character of the bill of ex- 
change — whether it is one that releases the documents upon 
acceptance or only upon payment. 

Factors in Foreign Exchange 

There are many factors to be considered in buying ex- 
change. Not only does the quoted rates indicate the mar- 
ket, but the time of the bill and the character have much to 
do with the rate. If the draft is drawn for a long time — 
thirty, sixty or ninety days — the acceptor, upon paying the 
draft before maturity, is entitled to a rebate for the unex- 
pired term. This rate of discount varies according to the 
official pate of the Government banks. In England a "pay- 
ment bill" is rebated at one-half per cent, above the adver- 
tised rate of interest paid by the joint stock banks on short- 
time deposits. If the rate is three and one-half per cent, the 
rebate rate will be four per cent, on English payment bills. 
There are also the taxes and other bank charges. 

Bills are usually drawn in sets of two and sometimes 
three. The reason for this came about through the perils of 
the sea. When in olden days a bill was drawn, it was drawn 
in duplicate or triplicate, and each one sent by a different 



582 THE PRACTICAL WORK OF A BANK 

vessel, so that in the event of disaster all would not be lost. 
This practice still obtains. Thus, in the loss of the Titanic 
but few if any bills were eventually lost, there having gone 



TRUST RECEIPT 



(DOCUMENTS FOR WAREHOUSING) 



fimrorO' from The Guaranty Trust Co. of New York Bill of Lading per — , «_ 

dated — — -for the following goods and merchandise, 

their property, markfed and numbered as follows : 



imported under the terms of Letter of Credit No. — -, issued by them for | — - [ account, 

the said Bill of Lading to be used by | -— • [ for the sole purpose of enfering the above 

described property at the United States Custom House at the Port of - , 

and of storing the same in the name, and as the property, of the said THE GUARANTY TRUST 
Co. OF NEW YORK, and subject only to their order, j -^ I hereby agreeing to so store 
the said property and to hand the storage receipt for the same to the said The Guaranty 
Trust Co. of New York, when obtained. 

I y^- [ ALSO AGREE to fully insure said property against fire, the loss, if any, payable 
to said The Guaranty Trust Co. of New York, and to hand to them the policies of 
insurance thereon. 



TRUST RECEIPT — DOCUMENTS FOR WAREHOUSING 

by other steamers duplicates of those aboard the ill-fated 
vessel. 

It would be futile in so brief a review of foreign ex- 
change to attempt to work out problems to show the profits 



FOREIGN AND DOMESTIC EXCHANGE 588 

or the various calculations in the exchange operations ; suffi- 
cient here to give the fundamental principles. 

The greatest danger in handling foreign exchange, as 
well as any loan secured by merchandise in transit, is the 
forged bill of lading, and all that has been said regarding 
the authenticity of these documents elsewhere here applies; 
for if the bill of lading be a forgery (and such are easy to 
obtain) the security rests entirely upon the drawer's credit, 
and if the bill is forged it is more than likely that the trans- 
action is bogus. 

A finance bill has been defined as "a long draft drawn 
by a banker in one country on a banker in another, some- 
times secured by collateral, but more often not, and issued 
by the drawing banker for the purpose of raising money." 2 
The origin of these finance bills is an agreement made be- 
tween two bankers by which one agrees to allow the other 
to draw on him up to a certain amount, and to accept the 
bills as presented, for a cominission. The drawer's credit 
must, of course, be good with the accepting bank, or collat- 
eral deposited, which would defeat the purpose of the ar- 
rangement, i. e., the raising of money on mere credit. 

If the drawing banker can sell his drafts at a high figure 
and when the acceptance is due, pay by buying a demand 
draft at a cheaper rate, he has made a double profit; but if 
the market is higher, he will lose part of his profits made by 
lending the proceeds of the first draft. It is a speculation 
in exchange. 

There is a vast amount of foreign money loaned out in 
this market. Interest rates here are usually higher than 
abroad, where capital has accumulated for centuries, and 
where there is usually a surplus, it being estimated that 
France yearly invests nearly a billion dollars in outside secu- 
rities. 

Suppose a foreign banker decides to loan in this market. 
He may go "joint account" with an American bank, or loan 
independently through the latter. The loan is negotiated 
with the borrower and the banker will draw a draft for the 
amount to be loaned, say, £10,000, and hand to the bor- 
rower who will sell it in the market. When payment is due 
in London, the borrower must have in hand a demand bill 
for the amount due. To illustrate: Suppose a London 

2Escher, Elements of Foreign Exchange. 



584 THE PRACTICAL WORK OF A BANK 

bank arranges to loan in New York £100,000. The New 
York bank draws a £100,000 bill at ninety days' sight, and 
turns over to a brokerage house, which has deposited sat- 
isfactory security. The firm sells the draft for $485,000. 
The bill goes to London and is accepted by the London 
bank, and sold in the market. In ninety days the bill will 
be due, and the New York bank will ask the borrower to 
send a demand draft for the £100,000 plus a commission. 
This bill will arrive in London a few days before the first 
draft is due and take it up. 

The profits depend upon the state of the market. In 
the first place, upon the amount the borrower realized from 
the sale of the first draft; in the second place, what the de- 
mand draft cost, and in the third, the commissions. If ex- 
change was high when the loan was made and low when it 
matured, the borrower has profited; if low when the loan 
was made and high when it matured, he has lost. 

If the loan had been for dollars, the bank would have 
turned over the proceeds of the draft first drawn, and not 
the draft itself. At the end of the time the firm would pay 
the loan in dollars plus interest and commissions, and the 
bank would invest the proceeds in a draft to be sent over to 
pay the loan when due. It is evident that the lender puts 
up no money, but simply allows his credit to be drawn 
against. The loan money will come from the open market, 
and the maturity met by the borrower on this side, and the 
banker has made a distinct profit from the use of his credit. 
The London bank must, of course, be in position to meet its 
acceptance. The profit to both banks concerned in the loan 
is the commission for the services. 

Profits in Foreign Exchange 

After the banker has ascertained what the rate of dis- 
count will be for bills due to arrive by a certain steamer, he 
is in position to buy bills here and send them over for dis- 
count and credit. On the balance thus created, he will draw 
his banker's drafts. If from selling his demand drafts he 
realizes more than the time drafts cost him, he is that much 
the gainer. To illustrate: A banker has bought, say, a 
£1,000 ninety days' sight prime draft on London, docu- 
ments deliverable on acceptance. This he has remitted to 



FOREIGN AND DOMESTIC EXCHANGE 585 

his foreign correspondent, and the latter has had it stamped 
with the required "bill stamp," had it discounted, and after 
having taken commissions out of the proceeds, has placed 
them to the credit of the American bank. In this process 
the bill has lost weight. It arrived in London as <£l,000, 
but after commissions, bill stamp and ninety days' discount 
have been deducted, the amount is reduced well below 
<£l,000. The net proceeds which go to make up the balance 
on which the American banker can draw his drafts are per- 
haps not over <£990. He paid so many dollars originally 
for the draft. If he can realize that many dollars by selling 
his demand drafts, he is even on the transaction; if more, it 
is to his profit; if less, he loses. 3 

Arbitrage 

Arbitrage is the dealing in foreign exchange through a 
third city rather than direct. For instance: A banker in 
New York desires to make a remittance to Paris. He finds 
that he can remit from London cheaper than direct from 
New York. He draws his draft on Paris and sells it. With 
the proceeds he buys a draft on London. He instructs his 
London banker to buy a draft on Paris for him and send 
it for his account. If the market is favorable for such an 
operation there may be a distinct profit over remitting di- 
rect. It can readily be understood that such operations re- 
quire a keen insight into the market and careful calculations 
so that profit results, and all sorts of combinations are pos- 
sible. But banks as banks do not deal in such matters ex- 
tensively, it being the function of specialists in foreign ex- 
change to carry through such operations. The average 
banker simply buys and sells drafts on balances abroad, 
either directly or indirectly, but most generally the latter, 
through large city banks. 

Cables 

A cable transfer is essentially the same as a telegraphic 
transfer of money. The banker on this side, upon receipt 
of the money, will cable the bank abroad to pay a certain 
amount to the party designated. This necessitates, of course, 

3 From Elements of Foreign Exchange — Escher. 



-586 



THE PRACTICAL WORK OF A BANK 





Guaranty Trust Company of New York 

FOREIGN DEPARTMENT 


COLLECTIONS 


No. Date 


Orig. No. 


For account of 


Payable in Amount 


Issued Term Accepted Due 


Drawer 


Drawee 








Acceptance and return to fgn. 






Documents on acceptance 




$ 




Documents on payment 






Bills of lading 


Rate 




Consular invoice 


Exch 


anpe 




Invoice 






Insurance certificate 






Certificate of inspection 




$ 






Declaration of shipper 






No protest 




No protest for non-acceptance 




Hold for arrival of goods 




Posted owner's book 









COLLECTIONS, FOREIGN EXCHANGE TRANSACTIONS 



carrying a balance abroad, as the transfer of money by 
telegraph necessitates a supply of cash by the one advised 
io pay on the other end. 

The foreign exchange market has no clearing-house — no 
"Exchange" — the market being very broad and "open." It 
is composed of banks and exchange houses operating inde- 
pendently, and all working as separate units. 

There being no exchange and no public place where of- 
ferings are made and accepted, the market is established by 
the money rates abroad and the demand and supply of bills. 



FOREIGN AND DOMESTIC EXCHANGE 587 

Travellers' letters of credit are documents issued by- 
banks and foreign exchange houses in which it is agreed that 
the issuing bank will pay up to a certain amount, and au- 
thorizing foreign correspondents to make advances on the 
letter as the owner requires. As the journey progresses, 
bank after bank will advance various amounts, endorsing 
the fact on the back, until the credit is exhausted. As ad- 
vances are made the issuing bank is notified and remits its 
banker's draft or settles by reciprocal account. 

Domestic Exchange 

One of the profitable functions of a bank is to furnish 
exchange, both foreign and domestic. By this is meant the 
furnishing of drafts and letters of credit on other points, for- 
eign and domestic. Domestic exchange is exceedingly sim- 
ple, the unit being the dollar, and computations in other 
forms of money are, therefore, not necessary. It is not an 
arithmetical process. 

The bank maintains an account in New York, Chicago 
or other large city. It will sell its orders on these places at 
a certain rate of exchange. As individuals keep bank ac- 
counts, so banks keep accounts; and as the individual might 
ask a fee for drawing a check, so the bank charges a fee. It 
is cheaper than to ship the money by express and the ex- 
change rate is based theoretically on the cost of shipping 
money. If the rate is greater than the actual express cost, 
of course the latter method would be used; but if less, the 
banker's check will be used. 

By virtue of the fact that checks on certain cities are re- 
ceived at par, it is desirable that merchants remit in such 
funds as a courtesy to their creditors, and is a right which 
the latter may insist upon. And as a personal check would 
cost the creditor the collection charges, therefore, the draft 
is not only just, but cheapest and is often requested. Not 
only are these drafts sold, but are used to settle debts, bank 
to bank. They are merely checks of one bank drawn on an- 
other. 

Some banks as a courtesy to large depositors give out 
these domestic drafts without charge. For instance: A 
large firm will have several out-of-town bills to settle. It 
will draw a check on its bank to cover the lot and send to 











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FOREIGN AND DOMESTIC EXCHANGE 589 

the latter with notation on the back to whose order drafts 
are to be drawn. The bank will draw several drafts in the 
various amounts in return for the one check, which the mer- 
chant will send with his remittance letters. The cost to him 
is nothing, but to the bank, theoretically, the cost is the ex- 
pense of placing funds in the New York bank to meet the 
drafts ; but as these funds are created by sending other items 
drawn on New York, this cost is small. 

Some banks use a draft book similar to the ordinary 
check book with stubs ; while others have the drafts made in 
pads, numbered, and account is kept of drafts issued on a 
"draft register," giving the name, date, amount, and draft 
number. 

The receiving teller taking in cash for a draft will make 
out a requisition for draft, and the paying teller exchanging 
a draft for the maker's check, will make a like requisition, 
in order to balance his accounts at the end of the day. 

The total drafts issued each day are credited to the 
banks drawn on, by passing credit tickets taken from the 
register in total for each bank. Exchange collected from 
this process is, of course, credited to exchange account. The 
accounts are reconciled as are the individual accounts of a 
bank with its own customers. Some banks notify the cor- 
respondent of all drafts drawn, and others of those over a 
certain amount. One bank in New York at one time fea- 
tured the opening of accounts upon which drafts could be 
drawn only in sums of $200 and less, the agreement being 
that larger drafts would not be drawn, nor would such be 
honored without communicating with the drawer. It was 
a clever safeguard against possible forgeries. 



APPENDIX 

RULINGS OF THE FEDERAL RESERVE BOARD 

Commercial Paper 

November 10, 1914. 

The Federal Reserve Board, under section 13 of the Federal Re- 
serve Act, has the right to determine or define the character of paper 
eligible for discount, to wit, "notes, drafts, and bills of exchange aris- 
ing out of actual commercial transactions; that is, notes, drafts, and 
bills of exchange issued or drawn for agricultural, industrial or commer- 
cial purposes, or the proceeds of which have been used or are to be used! 
for such purposes." 

Bearing in mind the requirements of the present situation, the Fed- 
eral Reserve Board believes that it would be inadvisable at this time to 
issue regulations placing a narrow or restricted interpretation upon the 
section defining the character of paper eligible for discount. It has,, 
therefore, been decided not at this time to enter upon the discussion of 
the question of single or double-name paper, but to admit both forms of 
bills to rediscount with the Federal Reserve Banks. 

The Federal Reserve Board proposes, however, to prescribe the fol- 
lowing basic principles for the guidance of Federal Reserve Banks and. 
member banks: 

Basic Principles 

(a) No bill shall be admitted to rediscount by Federal Reserve 
Banks the proceeds of which have been or are to be applied to perma- 
nent investment, and Regulation No. 2 has been formulated with the 
intention of giving effect to this principle, and is herewith inclosed. 

(b) Maturities of discounted bills should be well distributed. It is 
the well-established practice of European reserve banks to invest only in 
obligations maturing within a short time. It is a general rule not to 
purchase paper having more than ninety days to run. The maturities 
of these notes and bills are so well distributed as to enable those banks 
within a short time to strengthen their hold on the general money mar- 
ket by collecting at maturity or by reinvesting at a higher rate a very 
substantial proportion of their assets. 

Acting on this principle, the Federal Reserve Banks should be in 
position to liquidate, whenever such a course is necessary, substantially 
one-third of all their investments within a period of 30 days. Departure 
from this principle will endanger the safety of the system. It is ob- 
servance of this principle that affords justification for permitting mem- 
ber banks to count balances with Federal Reserve Banks as the equiva- 
lent of cash reserves. 

(c) Bills should be essentially self -liquidating. 

591 



692 THE PRACTICAL WORK OF A BANK 

Safety requires not only that bills 1 held by the Federal Reserve 
Banks should be of short and well distributed maturities, but, in addi- 
tion, should be of such character that it is reasonably certain that they 
can be collected when they mature. They ought to be essentially "self- 
liquidating/' or, in other words, should represent in every case some dis- 
tinct step or stage in the productive or distributive process — the pro- 
gression of goods from producer to consumer. The more nearly these 
steps approach the final consumer the smaller will be the amount in- 
volved in each transaction as represented by the bill, and the more auto- 
matically self-liquidating will be its character. 

Double-name paper drawn on a purchaser against an actual sale of 
goods affords, from the economic point of view, prima facie evidence of 
the character of the transaction from which it arose. Single-name notes, 
now so freely used in the United States, may represent the same kind of 
transactions as those bearing two names. Inasmuch, however, as the 
single-name paper does not show on its face the character of the trans- 
action out of which it arose — an admitted weakness of this form of 
paper — it is incumbent upon each Federal Reserve Bank to insist that 
the character of the business and the general status of the concern sup- 
plying such paper should be carefully examined in order that the dis- 
counting bank may be certain that no such single-named paper has been 
issued for purposes excluded by the act, such as investments of a per- 
manent or speculative nature. Only careful inquiry on these points will 
render it safe and proper for a Federal Reserve Bank to consider such 
paper a "self-liquidating" investment at maturity. 

Procedure 

Turning now to the question of procedure, it is not thought neces- 
sary to impose upon the banks the observance of methods which would 
involve needless difficulty or delay. It is, therefore, not deemed essen- 
tial that a statement of condition be attached to each bill when sold to a 
Federal Reserve Bank. 

It is, however, thought advisable by the board to require that on and 
after January 15, 1915, 2 no paper shall be discounted or purchased by 
Federal Reserve Banks that does not bear on its face the evidence that 
it is eligible for rediscount under the principles and definitions above 
outlined and as expressed in Regulation No. 2, and that the seller of the 
paper has given a statement to the member bank. A rubber stamp stat- 
ing, in substance: 

Eligible for Rediscount with 

FEDERAL RESERVE BANKS 

under regulations of 

Federal Reserve Board Circular No. 13 

CREDIT FILE No. 

DISTRICT No. 

(Name of Member Bank) 

is considered sufficient evidence to that effect at this time. It would be 

iFor brevity's sake, the words "bills" and "notes" whenever used in these 
paragraphs include bills, notes and drafts, as specified in the act. 
2This date has been indefinitely postponed. 



APPENDIX 593 

understood that the Federal Reserve Bank could at any time call for the 
appropriate credit file, and it may well be expected that the data thus 
gathered — particularly the files of more important firms and of those 
rediscounting in larger amounts — will be so catalogued as to furnish the 
nucleus of an effective credit bureau which, in turn, may eventually de- 
velop into a central credit bureau for the benefit of all the Federal Re- 
serve Banks of the system. 

The Statement 

For the time being certified accountant's statements will not be re- 
quired. This matter is reserved for regulation at a later date. The re- 
quired statement as outlined above should be signed under oath and 
should contain a short genera] description of the character of the busi- 
ness, the balance sheet, and the profit and loss account. Assets should 
be divided into permanent or fixed investments, slow assets, and quick 
assets. 

On the liability side should be shown capital, long-term loans, and 
short-term loans. Short-term loans should be in proper proportion to 
quick assets, and the statement should contain satisfactory evidence that 
short-term paper is not being sold against permanent or slow invest- 
ments. The statement should, furthermore, show the maximum aggre- 
gate amount up to which the concern supplying this paper expects to 
borrow on short credit or sale of its paper, and the concern giving the 
statement should obligate itself to obtain the member bank's consent be- 
fore exceeding the agreed limit. 

The affixing of the stamp stating such paper to be eligible for re- 
discount will be considered a solemn and binding declaration by the 
member bank that the statement has been examined from this point o£ 
view, and that the paper bought complies with all the requirements of 
the law and the regulations hereby imposed. 

The board appends two additional regulations: No. 3, covering dis- 
count transactions on or before January 15; No. 4, discount operations 
on or after January 15. 

Six-Months' Paper — The law provides that the Federal Reserve 
Board shall fix the percentage of its capital (by which is understood 
that portion of the capital paid in) up to which a Federal Reserve Bank 
may discount "notes, drafts and bills drawn or issued for agricultural 
purposes, or based on live stock, and having a maturity not exceeding 
six months." The law permits the Federal Reserve Board to deal with 
each Federal Reserve Bank individually in fixing this limit. 

The Federal Reserve Board has determined to fix this limit general- 
ly, and until further notice, at twenty-five per cent, of the capital that 
shall have been paid in from time to time. For those districts in which, 
during certain seasons, six-months' paper is particularly required to carry 
through agricultural operations the limit will be increased from time to 
time upon requests made by Federal Reserve Banks to the Federal Re- 
serve Board. 

39 



594 THE PRACTICAL WORK OF A BANK 

Regulations as per Ruling of the Federal Reserve Board 
Regulation No. 2 

That part of Section 13 of the Federal Reserve Act which relates 
to rediscount operations of Federal Reserve Banks reads as follows: 

Upon the indorsement of any of its member banks, with a waiver of 
demand, notice and protest by such bank, any Federal Reserve Bank may 
discount notes, drafts, and bills of exchange arising out of actual com- 
mercial transactions; that is, notes, drafts, and bills of exchange issued 
or drawn for agricultural, industrial, or commercial purposes or the pro- 
ceeds of which have been used, or are to be used, for such purposes, the 
Federal Reserve Board to have the right to determine or define the char- 
acter of the paper thus eligible for discount, within the meaning of this 
act. Nothing in this act contained shall be construed to prohibit such 
notes, drafts and bills of exchange, secured by staple agricultural prod- 
ucts, or other goods, wares, or merchandise from being eligible for such 
discount; but such definition shall not include notes, drafts, or bills cov- 
ering merely investments or issued or drawn for the purpose of carrying 
or trading in stocks, bonds, or other investment securities, except bonds 
and notes of Government of the United States. Notes, drafts, and bills 
admitted to discount under the terms of this paragraph must 
have a maturity at the time of discount of not more than 
ninety days. : Provided, That notes, drafts, and bills drawn or issued for 
agricultural purposes or based on live stock and having a maturity not 
exceeding six months may be discounted in an amount to be limited to a 
percentage of the capital of the Federal Reserve Bank, to be ascertained 
and fixed by the Federal Reserve Board. 

Any Federal Reserve Bank may discount acceptances which are based 
on the importation or exportation of goods and which' have a maturity at 
time of discount of not more than three months, and indorsed by at least 
one member bank. The amount of acceptances so discounted shall at no 
time exceed one-half the paid-up capital stock and surplus of the bank 
for which the rediscounts are made. 

The aggregate of such notes and bills bearing the signature or in- 
dorsement of any one person, company, firm, or corporation rediscounted 
for any one bank shall at no time exceed ten per centum of the unim- 
paired capital and surplus of said bank; but this restriction shall not 
apply to the discount of bills of exchange drawn in good faith against 
actually existing values. 

Any member bank may accept drafts or bills of exchange drawn 
upon it and growing out of transactions involving the importation or ex- 
portation of goods having not more than six-months' sight to run; but no 
bank shall accept such bills to an amount equal at any time in the ag- 
gregate to more than one-half its paid-up capital stock and surplus. 

Section 19 of the Federal Reserve Act, relating to reserves, reads in 
part as follows: 

Any Federal Reserve Bank may receive from the member banks as 
reserves, not exceeding one-half of each installment, eligible paper as 



APPENDIX 595 

described in section 14 properly indorsed and acceptable to the said re- 
serve bank. 3 

The announcement to be made by the Secretary of the Treasury on 
November 16 will bring into operation these two sections, and it is ac- 
cordingly necessary that the several Federal reserve banks shall be ad- 
vised of the characteristics that must be possessed by paper offered for 
rediscount to be acceptable under the terms of this act. 

While section 13 provides that the Federal Reserve Board shall have 
the right to determine or define the character of the paper thus eligible 
for discount within the meaning of the act, the section referred to de- 
fines in general terms the elements which such paper must possess in or- 
der to be eligible. 

All paper offered for discount under this section to any Federal Re- 
serve Bank must conform to the following requirements: 

First — It must be indorsed by a national or State bank or trust com- 
pany which is a member of the Federal Reserve Bank to which it is of- 
fered for rediscount. 

Second — Such bank must, with its indorsement, waive demand notice 
and protest. 

Third — Paper so offered shall be in the form of notes, drafts, or bills 
of exchange arising out of commercial transactions ; that is, notes, drafts, 
and bills of exchange issued or drawn for agricultural, industrial, or 
commercial purposes, or the proceeds of which have been used or are to 
be used for such purposes. 

Fourth — If in the form of acceptances, they must be based on trans- 
actions, involving the importation or exportation of goods and must have 
a maturity at the time of discount of not more than three months to run. 
They must, furthermore, be indorsed by at least one member bank, and 
the total amount offered shall in no event exceed one-half the paid-up 
capital stock and surplus of the bank, offering same. 

Fifth — The aggregate of notes and bills bearing the signatures or 
indorsement of any one person, company, firm or corporation rediscount- 
ed for any one bank shall at no time exceed ten per cent, of the un- 
impaired capital and surplus of said bank; but this restriction shall not 
apply to the discount of bills of exchange drawn in good faith against 
actually existing values. 

Subject to these limitations it devolves upon the Federal Reserve 
Board to determine or define for the several Federal Reserve Banks (1) 
notes, drafts, and bills of exchange eligible for rediscount; (2) bank ac- 
ceptances eligible for rediscount. 4 

The limitations relating to rediscount operations, contained in section 
13 of the act, may be divided into two classes: First, those positive lim- 
itations under which such notes, drafts, and bills of exchange may be 

3Attention is called to the fact that the error in the original act which 
refers to eligible paper, referred to in section 14, has been corrected by amend- 
ment approved August 15, 1914, and this section now reads: 

"Any Federal reserve bank may receive from the member banks as reserves, 
not exceeding one-half of each installment, eligible paper as described in section 
thirteen, properly indorsed and acceptable to the Federal reserve bank." 

4 Bank acceptances eligible for rediscount are defined in regulation No. 6. 



596 THE PRACTICAL WORK OF A BANK 

accepted for rediscount; and, second, those limitations specifically stat- 
ing what paper shall be excluded. 

If we begin with the latter, we find the very clear provision exclud- 
ing all notes, drafts, and bills of exchange which are "issued or drawn 
for the purpose of carrying or trading in stocks, bonds, or other in- 
vestment securities (except bonds and notes of the Government of the 
United States)." This clause does not require comment. 

The act further excludes notes, drafts, and bills of exchange cover- 
ing "merely investments." 

Any funds employed in agriculture, commerce, or industry are quasi- 
investments, and the emphasis is, therefore, to be laid on the word 
"merely" in this connection. 

From this point of view are to be excluded all bills whose proceeds 
have been or are to be used in permanent or fixed investments of any 
kind. "Agricultural, industrial, or commercial purposes" cannot, there- 
fore, be held to include investments in land, plant, machinery, perma- 
nent improvements, or transactions of a similar nature. 

The purchase of commodities for purposes which are? merely specula- 
tive and not connected with an ultimate process of manufacturing or dis- 
tribution would constitute a "mere" investment, and bills covering such 
investments are accordingly not eligible for rediscount. 

In order to be eligible for rediscount bills must "arise out of actual 
commercial transactions," and "proceeds must have been used or they 
are to be used for agricultural, industrial, or commercial purposes." 

In like manner "notes, drafts, and bills of exchange secured by staple 
agricultural products or other goods, wares, or merchandise" are eligible 
for rediscount provided they arise out of "actual commercial transac- 
tions" covering some particular stage in the process of production and 
distribution. 

They are not eligible when drawn to cover merely speculative in- 
vestments. 

Regulation No. 3 

Whenever a member bank shall offer for rediscount any note, draft, 
or bill of exchange bearing the indorsement of such member bank, with 
waiver of demand notice and protest, the directors or executive commit- 
tee of the Federal Reserve Bank may, until January 15, 1915, accept 
as evidence that the proceeds of such note, draft, or bill of exchange 
were or are to be used for agricultural, industrial, or commercial pur- 
poses (and that such notes, drafts, or bills of exchange in other respects 
comply with the regulations of the board) a written statement from the 
officer of the applying bank that of his own knowledge and belief the 
original loan was made for one of the purposes mentioned, and that the 
provisions of the act and regulations issued by the board have been com- 
plied with. 5 

Regulation No. 4 6 

From and after January 15, 1915, all notes, drafts, or bills of ex- 

e See Regulation B, following. 

^Revoked January 12, 1915. See page 598. 



APPENDIX 597 

change offered for rediscount shall show on their face, or by indorse- 
ment, a statement substantially to the following effect: 

Eligible for rediscount with Federal Reserve Banks under regu- 
lations of the Federal Reserve Board Circular No. 13: 

Credit File No 

District No 

Name of member bank 

The credit file number shall refer to evidence in possession of the 
member bank that the proceeds of such notes, drafts, or bills of ex- 
change, under the terms of the loans made or to be made, were, or are 
to be used for agricultural, industrial, or commercial purposes, as re- 
quired by Section 13 of the Federal Reserve Act, and as imposed by 
Regulation No. 2 of the Federal Reserve Board, and such credit files 
shall be open to inspection by any examiner appointed by the Comp- 
troller of the Currency or selected by the Federal Reserve Bank dis- 
counting same, and copies of such files, or any part thereof, shall be 
furnished to the officers of the Federal Reserve Bank upon request. 

The credit files referred to should contain not only evidence of the 
purpose or purposes for which such loans are made, but also full and 
complete information as to the financial responsibility of the borrower, 
including a short general description of the character of the business, 
balance sheet, and profit and loss account of the borrower. Assets 
should be divided into permanent or fixed investments, slow assets, and 
quick assets. On the liability side should be shown capital, long-term 
loans and short-term loans. Short-term loans should be in proper pro- 
portion to quick assets, and the statement should contain satisfactory 
evidence that short-term paper is not being sold against permanent or 
slow investments. The statement should, furthermore, show the maxi- 
mum aggregate amount up to which the concern supplying this paper 
expects to borrow on short credit or sale of its paper, and the individual, 
firm, or corporation giving the statement should obligate himself or it- 
self to obtain the member bank's consent before exceeding the agreed 
limit. The affixing of the stamp stating such paper to be eligible for 
rediscount will be considered a solemn and binding declaration by the 
member bank that the statement has been examined from this point of 
view and that the paper bought complies with all the requirements of 
the law and of the regulations hereby imposed. 

Regulation No. 5 

Whenever notes, drafts, or bills of exchange offered for rediscount 
have a maturity of more than three but less than six months, and the 
Federal Reserve Bank has been satisfied in the manner provided by Reg- 
ulation No. 2 that the proceeds of loans applied for are used or are to 
be used for agricultural purposes or are based upon live stock, such 
notes, drafts, and bills of exchange may, until further notice, be accepted 
for rediscount in an aggregate amount not exceeding twenty-five per 
cent, of the paid-in capital of the Federal Reserve Bank accepting same. 



598 THE PRACTICAL WORK OF A BANK 

Regulation No. 6 

Whenever bank acceptances are offered for rediscount it must ap- 
pear on the face of such acceptances that the proceeds thereof were 
used or are to be used in connection with a transaction involving the im- 
portation or exportation of goods; that is to say, it must appear that 
there has been an actual bona fide sale which involves the transporta- 
tion of goods from some foreign country to the United States or from 
the United States to some foreign country. 

Acceptance of Statements in Lieu of Certificates as to Charac- 
ter of Commercial Paper 
January 12, 1915. 

The necessity of giving more time before Regulation No. 3 of No- 
vember 10, 1914, shall become effective is recognized by the Federal 
Reserve Board. The accompanying regulation is, therefore, issued as 
appended. 

Regulation No. 4, of 1914, which was to go into effect January 15, 
is hereby revoked and canceled and will be replaced by a new regula- 
tion soon to be issued. 

Regulation A, Series of 1915, Superseding Regulation No. 3, of 

1914 

Whenever a member bank shall offer for rediscount any note, draft, 
or bill of exchange bearing the indorsement of such member bank, with 
waiver of demand notice and protest, the directors or executive commit- 
tee of the Federal Reserve Bank may, until July 15, 1915, accept as 
evidence that the proceeds of such note, draft, or bill of exchange were 
or are to be used for agricultural, industrial or commercial purposes 
(and that such notes, drafts or bills of exchange in other respects com- 
ply with the regulations of the board) a written statement from the 
officer of the applying bank that of his own knowledge and belief the 
original loan was made for one of the purposes mentioned, and that the 
provisions of the act and regulations issued by the board have been com- 
plied with. 

Six Months' Agricultural Paper 
January 15, 1915. 

The appended regulation is issued to supersede Regulation No. 5, 
of November 10, 1914, which is hereby revoked and canceled. 

Regulation C, Series of 1915, Superseding Regulation No. 5, of 

Nov. 10, 1914 

The word "bill" when used in this regulation shall be construed to 
include notes, drafts, or bills of exchange. 

Each Federal Reserve Bank may receive for discount bills which 
have a maturity of more than three but less than six months, in an ag- 



APPENDIX 599 

gregate amount equal to a percentage of its capital stock to be fixed 
from time to time for each Federal Reserve Bank by the Federal Re- 
serve Board. 

Provided, however. That such bills are drawn or issued for agricul- 
tural purposes or are based on live stock; that is, that their proceeds 
have been used or are to be used for agricultural purposes, including 
the breeding, raising, fattening or marketing of live stock; and 

Provided further, That such bills comply in all other respects with 
each and every provision of Regulation B, series of 1915. 

Commercial Paper 
January 25, 1915 

When Circular No. 13, bearing date of November 10, 1914, and the 
accompanying regulations were issued it was hoped that a period of two 
months would suffice to enable member banks to familiarize their cus- 
tomers with the requirements of Regulation No. 4 of 1914. It ap- 
pears, however, that in many districts the needed readjustments of 
banking and business practice cannot be effected in so short a period. 
An extension of time, was, therefore, asked by both member banks and 
their customers for the purpose of adjusting their methods to the new 
requirements and was granted by the board (see Regulation A, accom- 
panying Circular No. 2, Series of 1915). 

In order to facilitate operations, particularly during the initial pe- 
riod, the requirements as to borrowers' statements have been modified. 
But while Circular No. 13, of November 10, 1914, is now superseded, 
the board has not modified its views upon the general principles therein 
expressed as being of fundamental importance in the best development 
of the new system. 

The board has formulated Regulation B, hereto annexed (para- 
graph III), a new method for certifying the eligibility of bills for re- 
discount. While banks will not be required to comply with the pro- 
visions of paragraph III until after July 15, the new method prescribed 
is made a part of this regulation in order that advance notice may be 
given to all banks, so that those which are equipped to do so may be- 
gin to operate under its provisions as soon as possible. The board sug- 
gests, furthermore, that Federal Reserve Banks insist that the accom- 
panying regulation be applied as promptly as possible to all so-called 
"purchased paper" — that is, paper bought through brokers or others 
with whom the purchasing bank has no direct business relations. Where 
such direct connections do not exist the requirement that statements, both 
as to business conditions and methods of borrowing, be furnished ap- 
pears to be a matter of prudence and should not be postponed. In such 
cases as these, where borrowers' statements in the required form are not 
available until after the close of the business year, statements for the 
previous year may be accepted, pending receipt of new statement in re- 
quired form, even though such statements may not contain all the de- 
sired data. 

While it has been thought best not to insist upon a written state- 
ment in the case of limited borrowings by depositors, when officers of 



600 THE PRACTICAL WORK OF A BANK 

member banks, from their own personal knowledge, certify to the eligi- 
bility of the paper for discount, it is urged, nevertheless, that member 
banks do their utmost to accustom their borrowers to furnish such state- 
ments. 

Regulation B, Series of 1915, Superseding Regulations 2 and 4 

of 1914 

The word "bill," when used in this regulation, shall be construed to 
include notes, drafts, or bills of exchange, and the word "goods" shall 
be construed to include goods, wares, merchandise, or staple agricultural 
products, including live stock. 

I. Statutory Requirements — The Federal Reserve Act provides that 
a bill, other than an acceptance (see Circular No. 5 and Regulation D, to 
be published shortly), to be eligible for rediscount hy a member bank 
with a Federal Reserve Bank, must comply with the following statutory 
reguirements : (a) It must be indorsed by a member bank, accompanied 
by a waiver of demand, notice and protest, (b) It must have a matu- 
rity at the time of discount of not more than ninety days, except as pro- 
vided by Regulation C, accompanying Circular No. 4, Series of 1915. 
(c) It must have arisen out of actual commercial transactions; that is, 
be a bill which has been issued or drawn for agricultural, industrial, or 
commercial purposes, or the proceeds of which have been or are to be 
used for such purposes, (d) It must not have been issued for carrying 
or trading in stocks, bonds, or other investment securities except bonds 
and notes of the Government of the United States; but the pledge of 
goods as security for a bill is not prohibited. 

II. Character of Paper Eligible — The Federal Reserve Board, ex- 
ercising its statutory right to define the character of a bill eligible for 
rediscount at a Federal Reserve Bank, has determined: (a) That it must 
be a bill the proceeds of which have been used or are to be used in pro- 
ducing, purchasing, carrying, or marketing goods in one or more of the 
steps of the process of production, manufacture, and distribution, (b) 
That no bill is "eligible," the proceeds of which have been used or are 
to be used: (1) For permanent or fixed investments of any kind, such as 
land, buildings, machinery (including therein additions, alterations, or 
other permanent improvements, except such as are properly to be re- 
garded as costs of operation). It may be considered as sufficient evi- 
dence of compliance with this requirement if the borrower shows, by 
statement or otherwise, that he has a reasonable excess of quick assets 
over his current liabilities on open accounts, short-term notes, or other- 
wise; (2) for investments of a merely speculative character, whether 
made in goods or otherwise. 

III. Method of Certifying Eligibility — Any member bank applying 
for rediscount of a bill after July 15, 1915, must certify in its letter of 
application, over the signature of a duly authorized officer, that to the 
best of its knowledge and belief the bill was issued for one of the pur- 
poses mentioned in the above paragraphs and conforms to Section 13 of 
the Federal Reserve Act and to this regulation. 

It is recommended that every member bank maintain a file which shall 



APPENDIX 601 

contain original signed statements of the financial condition of borrow- 
ers, or true copies thereof, certified by a member bank or by a notary 
public, designating where the original statement is on file. Statements 
should contain all the information essential to a clear and correct knowl- 
edge of the borrower's credit and of his method of borrowing. A sched- 
ule specifying certain information, which it is desirable that such state- 
ments should include, is hereto appended. 

Member banks shall certify in their letters of application for re- 
discount whether the paper offered for rediscount is depositor's or pur- 
chased paper, or paper rediscounted for other member banks, and 
whether statements are on file. When it does not appear that such state- 
ments are on file, except as hereinafter provided under (1), (2) and 
(3) below, the Federal Reserve Bank shall satisfy itself as to the eligi- 
bility of the paper offered for rediscount, and member banks will be ex- 
pected to use such statement forms, identifying stamps, etc., as may be 
prescribed by the respective Federal Reserve Banks. 

Any member bank rediscounting with a Federal Reserve Bank paper 
acquired from another member bank, with the indorsement of such mem- 
ber bank, may accept such member's certification regarding the character 
of the paper and the existence of the necessary statements. 

Statements of the borrower's financial condition may be waived where 
bills offered for rediscount have been discounted by member banks for 
any of their depositors in the following cases: (1) If the bill bears the 
signatures of the purchaser and the seller of the goods and presents 
prima facie evidence that it was issued for goods actually purchased or 
sold; or (2) if the aggregate amount of obligations of such depositor 
actually rediscounted and offered for rediscount does not exceed $5,000, 
but in no event a sum in excess of ten per centum of the paid-in capital 
of the member bank; or (8) if the bill be specifically secured by ap- 
proved warehouse receipts covering readily marketable staples; Provided, 
however, That the bank shall certify to these conditions on the applica- 
tion blank in a manner to be designated by the respective Federal Re- 
serve Banks. 



Information Desired in Credit Files of Member Banks ' 

The credit files of member banks, referred to in the above regula- 
tion, should include information concerning the following matters: (a) 
The nature of the business or occupation of the borrower; (b) if an in- 
dividual, information as to his indebtedness and his financial responsi- 
bility; (c) if a firm or corporation, a balance sheet showing quick as- 
sets, slow assets, permanent or fixed assets, current liabilities and ac- 
counts, short-term loans, long-term loans, cajiital and surplus; (d) all 
contingent liabilities, such as indorsements, guaranties, etc.; (e) particu- 
lars respecting any mortgage debt and whether there is any lien on cur- 
rent assets; (f) such other information as may be necessary to deter- 
mine whether the borrower is entitled to credit in the form of short- 
term loans. 



602 THE PRACTICAL WORK OF A BANK 

Circular No. 8, Series 1915 

Waiver op Demand, Notice and Protest 
January 27, 1915 

Section 13 of the Federal Reserve Act provides in part: "Upon the 
indorsement of any of its member banks, with a waiver of demand, no- 
tice, and protest by such bank, any Federal Reserve Bank may dis- 
count notes, drafts, and bills of exchange arising out of actual commer- 
cial transactions." 

Attention is called to the fact that the waiver of demand, notice, and 
protest by the bank procuring the discount does not release the holder 
of the note or bill discounted from the duty to protest such note or bill 
in order that those indorsers who have not executed such a waiver may 
be held liable. 

If the holder should fail to protest an indorsed note or bill at ma- 
turity, the Federal Reserve Bank might, in such circumstances, hold the 
member bank liable on account of the waiver executed, but other in- 
dorsers would be legally released. 

Federal Reserve Banks are, therefore, cautioned to take all necessary 
steps to insure the protest of all maturing notes and bills which are in 
their possession or have been sent for collection through any correspond- 
ent bank wherever such notes or bills contain any indorsements not ac- 
companied by a waiver of demand, notice, and protest. To insure this 
the bank or agent presenting any note or bill, held by the Federal Re- 
serve Bank, at the place of payment at maturity should be instructed, if 
the same is dishonored, to immediately protest such note or bill and to 
have all necessary notices sent to the indorsers. 

Bankers' Acceptances 
February 8, 1915 

"Acceptances" are dealt with in the Federal Reserve Act in two dif- 
ferent sections — Sections 13 and 14. Section 13 deals with the "ac- 
ceptance" as one of the forms of paper in the discount of which Fed- 
eral Reserve Banks may engage, restricting the discount of acceptances 
to such as bear the indorsement of a member bank. Section 14 invests 
the Federal Reserve Banks, under regulations to be prepared by the 
Federal Reserve Board, with power to engage in open-market opera- 
tions, of which the "banker's acceptance" is one of the most important. 

Careful study has led the Federal Reserve Board to the conclusion 
that, at any rate in the first stages, so far as practicable, priority should 
be given to operations under Section 13. The acceptance is still in its 
infancy in the field of American banking. How rapid its development 
will be cannot foretold; but the development itself is certain. Oppor- 
tunity is given by the Federal Reserve Act to assist the movement in this 
new direction; the present regulations are to be regarded as a first step 
and will be extended as circumstances and a reasonable regard for the 
other uses and needs of the credit facilities of the Federal Reserve Sys- 
tem may warrant. 

It is believed that it would unduly restrict the development of the 



APPENDIX 603 

acceptance business to keep it altogether confined within the provisions 
of Section 13, which require that acceptances, in order to be eligible for 
rediscount at a Federal Reserve Bank, must bear the indorsement of a 
member bank ; particularly in view of the further fact that the law lim- 
its the amount of acceptances which may be taken with the indorse- 
ment of a member bank to fifty per centum of its paid-in capital and 
surplus. Having found it necessary to extend the scope of dealings in 
acceptances beyond these limits, the board has exercised the authority 
conferred upon it by Section 14, and has formulated regulations cover- 
ing the purchase of acceptances without invariably requiring the indorse- 
ment of a member bank. 

The acceptance is the standard form of paper in the world discount 
market, and both on this account and because of its acknowledged 
liquidity universally commands a preferential rate. By reason of its be- 
ing readily marketable it is widely regarded as a most desirable paper 
in the secondary reserves of banks and will help to provide an effec- 
tive substitute for the "call loan." Its growth, however, will depend 
upon the ability of the American market to adjust its rates effectively to 
those prevailing in other markets for paper of this class. 

Recognizing these facts, the Federal Reserve Board has determined 
to allow the Federal Reserve Banks latitude in fixing rates for accept- 
ances: Federal Reserve Banks may, from time to time, submit for the 
approval of the board maximum and minimum rates within which they 
desire to be authorized to deal in acceptances; within such limits, and 
subject to such modifications as may be imposed by the board, Federal 
Reserve Banks will be allowed to establish the rates at which they will 
deal in acceptances. 

The board believes it to be in accordance with the spirit of the Act 
to accord preferential treatment to acceptances bearing the indorsement 
of member banks, offered for rediscount under Section 13 — even to the 
point of allowing lower rates for such acceptances, inasmuch as, under 
the terms of this section, such acceptances are available as collateral 
against the issue of Federal Reserve Notes: and the board will sanction 
a slight preferential in favor of acceptances bearing the indorsement of 
member banks. 

When acceptances bearing the indorsement of member banks are not 
obtainable in adequate amount or upon satisfactory terms, Federal Re- 
serve Banks desiring to purchase acceptances should restrict themselves, 
as far as possible, to such acceptances as bear some other responsible 
signature (other than that of the drawer and the acceptor), and prefer- 
ably that of a bank or banker. 



Regulation D, Series of 1915 

I. Definition — In this regulation the term "acceptance" is defined 
as a draft or bill of exchange drawn to order, having a definite maturity 
and payable in dollars, in the United States, the obligation to pay 
which has been accepted by an acknowledgment written or stamped and 
signed across the face of the instrument by the party on whom it is 
drawn; such agreement to be to the effect that the acceptor will pay at 



604 THE PRACTICAL WORK OF A BANK 

maturity according to the tenor of such draft or bill without qualifying 
conditions. 

II. Statutory Requirements Under Sections IS and lJj. — Section 13 
of the Federal Reserve Act provides that: (a) Any Federal Reserve 
Bank may discount acceptances: (1) Which are based on the importa- 
tion or exportation of goods; (2) which have a maturity at time of dis- 
count of not more than three months; and (3) which are indorsed by 
at least one member bank, (b) The amount of acceptances so discounted 
shall at no time exceed one-half the paid-up capital stock and surplus of 
the bank for which the rediscounts are made. (c) The aggregate of 
notes and bills bearing the signature or indorsement of any one person, 
company, firm or corporation redis counted for any one bank shall at no 
time exceed ten per centum of the unimpaired capital and surplus of 
said bank; but this restriction shall not apply to the discount of bills of 
exchange, drawn in good faith against actually existing values. 

Section 14 of the Federal Reserve Act permits Federal Reserve 
Banks, under regulations to be prescribed by the Federal Reserve Board,, 
to purchase and sell in the open market bankers' acceptances, with or 
without the indorsement of a member bank. 

III. "Eligibility" — The Federal Reserve Board has determined 
that until further order, to be eligible for discount under Section 13, by 
Federal Reserve Banks, at the rates to be established for bankers' ac- 
ceptances : (a) Acceptances must comply with the provisions of Para- 
graph II (a), (b), (c) hereof; (b) acceptances must have been made 
by a member bank, non-member bank, trust company, or by some private 
banking firm, person, company or corporation engaged in the business 
of accepting or discounting. Such acceptances will hereafter be re- 
ferred to as "bankers' " acceptances; 7 (c) a banker's acceptance must be 
drawn by a commercial, industrial, or agricultural concern (that is, some 
person, firm, company, or corporation) directly connected with the im- 
portation or exportation of the goods involved in the transaction in which 
the acceptance originated; (d) a banker's acceptance must bear on its. 
face, or be accompanied by evidence in form satisfactory to a Federal 
Reserve Bank, that it originated in an actual bona fide sale or consign- 
ment involving the importation or exportation of goods. Such evidence 
may consist of a certificate on or accompanying the acceptance to the 
following effect: 

This acceptance is based upon a transaction involving the 

importation or exportation of goods. Reference No. . 

Name of acceptor: ; 

(e) bankers' acceptances, other than those of member banks, shall be 
eligible only after the acceptors shall have agreed in writing to furnish 
to the Federal Reserve Banks of their respective districts, upon request, 
information concerning the nature of the transactions against which ac- 
ceptances (certified or bearing evidence under III (d) hereof) have 
been made; (f) a bill of exchange accepted by a "banker" may be con- 
sidered as drawn in good faith against "actually existing values," under 



TDrafts and bills of exchange eligible for discount under section 13, other 
than "bankers' " acceptances, have been dealt with by Regulation B, series of 1915. 



APPENDIX 605 

II (c) hereof, when it is secured by a lien on or by transfer of title to 
the goods to be transported; (g) except in so far as they may be se- 
cured by a lien on or by transfer of the title to the goods to be trans- 
ported, the bills of any person, firm, company, or corporation, drawn on 
and accepted by any private banking firm, person, company, or corpora- 
tion (other than a bank or trust company) engaged in the business of 
discounting or accepting, and discounted by a Federal Reserve Bank, 
shall at no time exceed in the aggregate a sum equal to five per centum 
of the paid-in capital of such Federal Reserve Bank; (h) the aggregate 
of acceptances of any private banking firm, person, company, or cor- 
poration (other than a bank or trust company) engaged in the business 
of discounting or accepting, discounted or purchased by a Federal Re- 
serve Bank, shall at no time exceed a sum equal to twenty-five per cen- 
tum of the paid-in capital of such Federal Reserve Bank. 

To be eligible for purchase by Federal Reserve Banks under Section 
14, bankers' acceptances must comply with all requirements and be sub- 
ject to all limitations hereinbefore stated, except that they need not be 
indorsed by a member bank: Provided, however, That no Federal Re- 
serve Bank shall purchase the acceptance of a "banker" other than a 
member bank which does not bear the indorsement of a member bank, 
unless it has first secured a satisfactory statement of the financial con- 
dition of the acceptor in form to be approved by the Federal Reserve 
Board. 

IV. Policy as to Purchases — While it would appear impracticable 
to fix a maximum sum or percentage up to which Federal Reserve Banks 
may invest in bankers' acceptances, both under Section 13 and Section 
14, it will be necessary to watch carefully the aggregate amount to be 
held from time to time. In framing their policy with respect to trans- 
actions in acceptances, Federal Reserve Banks will have to consider, not 
only the local demands to be expected from their own members, but 
also requirements to be met in other districts. The plan to be followed 
must in each case adapt itself to the constantly varying needs of the 
country. 

National Banks as Executors and Trustees 
February 15, 1915 

The Federal Reserve Board is empowered by paragraph k of Sec- 
tion 11 of the Federal Reserve Act to grant by special permit to na- 
tional banks the right to act as trustee, executor, administrator, or reg- 
istrar of stocks and bonds where the exercise of such powers is not in 
contravention of State laws. In the exercise of such power, the board 
issues herewith Regulation H covering such special permits. 

The board will from time to time modify and supplement its regula- 
tions on this subject as experience may dictate. 

Regulation H, Series of 1915 

I. Statutory Provisions — The Federal Reserve Act provides: "Sec. 
11. The Federal Reserve Board shall be authorized and empowered: 
(k) To grant by special permit to national banks applying therefor, 



606 THE PRACTICAL WORK OF A BANK 

when not in contravention of State or local law, the right to act as trus- 
tee, executor, administrator, or registrar of stocks and bonds, under such 
rules and regulations as the said board may prescribe." 

II. Applications — 1. A national bank desiring to exercise any or 
all of the privileges authorized by Section. 11, sub-section (k), of the 
Federal Reserve Act, shall make application to the Federal Reserve 
Board on a form approved by said board (Form No. 61). Such appli- 
cation shall be forwarded by the applying bank to the chairman of the 
board of directors of the Federal Reserve Bank of its district, and shall 
thereupon be transmitted to the Federal Reserve Board with his recom- 
mendations. 2. There shall be attached to each application a statement 
of the character and extent of the privileges which the applying bank 
desires to exercise under the following headings: (a) Trustee of per- 
sonal trusts; (b) trustee of corporate trusts; (c) administrator of per- 
sonal estates; (d) executor of wills; (e) registrar of stocks; (f) regis- 
trar of bonds. 3. Each applicant shall, upon request, furnish copies of 
the laws of the State in which it is located bearing upon the exercise of 
such powers in force at the time application is made. 

III. Separate Departments — Every national bank permitted to act 
under this section shall establish a separate trust department, and shall 
place such department under the management of an officer or officers, 
whose duties shall be prescribed by the board of directors of the bank. 

IV. Provision for Keeping Trust Funds — The funds, securities, and 
investments held in each trust shall be held separate and distinct from 
the general funds and securities of the bank, and separate and distinct 
one from another. The ledgers and other books kept for the trust de- 
partment shall be entirely separate and apart from the other books and 
records of the bank. 

V. Examinations — Examiners appointed by the Comptroller of the 
Currency or designated by the Federal Reserve Board will hereafter be 
instructed to make thorough and complete audits of the cash, securities^ 
accounts, and investments of the trust department of every bank at the 
same time that examination is made of the banking department. 

VI. Conformity with State Laws — Nothing in these regulations 
shall be construed to give to a national bank doing business as trustee, 
executor, administrator, or registrar of stocks and bonds under Section 
11 (k) of the Federal Reserve Act any rights or privileges in contra- 
vention of the laws of the State in which the bank is located. 

VII. Revocation of Permits — The Federal Reserve Board reserves 
the right to revoke permits granted under these regulations in any case 
where in the opinion of the board a bank has willfully violated the pro- 
visions of these regulations or the laws of any State relating to the op- 
erations of such bank when acting as trustee, executor, administrator, or 
registrar of stocks and bonds. 

VIII. Changes in Rules — These regulations are subject to change 
by the Federal Reserve Board; provided, however, that no such change 
shall prejudice obligations undertaken in good faith under regulations, 
in effect at the time the obligation was assumed. 



APPENDIX . 607 

Regulation I, Series of 1915, Superseding Regulation No. 9 of 

December 31, 1914 

Loans on Farm Lands 
February 10, 1915 

Section 24 of the Federal Reserve Act provides that: "Any nation^ 
al banking association not situated in a central reserve city may make 
loans secured by improved and unencumbered farm land, situated with- 
in its Federal Reserve District, but no such loan shall be made for a 
longer time than five years, nor for an amount exceeding fifty per cen- 
tum of the actual value of the property offered as security. Ajiy such 
bank may make such loans in an aggregate sum equal to twenty-five 
per centum of its capital and surplus, or to one-third of its time deposits, 
and such banks may continue hereafter as heretofore to receive time de- 
posits and to pay interest on the same." 

National banks not located in central reserve cities may, therefore^ 
now legally make loans secured by mortgages on real estate within the 
following limitations: 1. The real estate security must be farm land. 
2. It must be improved. 3. There must be no prior lien; in other 
words, the lending bank must hold an absolute first mortgage or deed of 
trust. 4. The property must be located in the same Federal Reserve 
District as the bank making the loan. 5. The amount of the loan 
must not exceed fifty per centum of the actual value of the property 
upon which it is secured. 6. The loan must be for a period not longer 
than five years. 7. The maximum amount of loans which a national 
bank may make on real estate under the terms of the act shall be lim- 
ited to an amount not in excess of one-third of its time deposits at the 
time of the making of the loan, and not in excess of one-third of its 
average time deposits during the preceding calendar year; provided, 
however, that if one-third of such time deposits as of the date of mak- 
ing the loan, or one-third of the average time deposits for the preceding 
calendar year, shall have amounted to less than one-fourth of the cap- 
ital and surplus of the bank as of the date indicated, in such event the 
bank shall have authority to make loans upon real estate under the terms 
of the act to the extent of one-fourth of the bank's capital and surplus 
as of the date of making the loan. 

In order that real estate loans held by a bank may be readily classi- 
fied, a statement signed by the officers making a loan and having knowl- 
edge of the facts upon which it is based must be attached to each note 
secured by a first mortgage on improved farm land, certifying in detail 
as of the date of the loan that all the requirements of law have been 
duly observed. 

The board calls attention to the closing paragraph of Section 24 of 
the act which provides that: "The Federal Reserve Board shall have 
power from time to time to add to the list of cities in which national 
banks shall not be permitted to make loans secured upon real estate in 
the manner described in this section" and gives notice that the fore- 
going regulations are subject to the authority of the board to revise the 
list of cities in which national banks shall not be permitted to make real 
estate loans in the manner above provided. 



608 THE PRACTICAL WORK OF A BANK 

January 15, 1915. 
Time Deposits and Savings Accounts 

The Federal Reserve Board deems it advisable to amplify its reg- 
ulation relating to time deposits and savings accounts issued November 
11, 1914, and to define under the following headings those deposits 
against which the Federal Reserve Act requires a reserve of only five 
per cent, to be maintained: 

1. Time deposits, open accounts. 

2. Savings accounts. 

3. Certificates of deposit. 

It was clearly not the intention of the act to permit a reduction of 
reserve to five per cent, upon deposits which may ordinarily be checked 
upon, but in respect to which a bank, by a blanket provision in its by- 
laws, may at any time require a withdrawal notice of not less than thirty 
days to be given. The reduction of the reserve to be carried against 
time deposits is intended to apply only to deposits under written agree- 
ment not to be withdrawn within thirty days from the date as of which 
the reserve calculation is made. Therefore, on the date of calculating 
reserve, under the definitions contained in the accompanying regulation, 
no deposit may be deemed a time deposit, whether an open account or 
on certificate — 

(a) If it is payable within thirty days, because of the approach- 
ing end of the specified period for which it was deposited or because of 
receipt of notice of the date on which withdrawal will be made; 

(b) If it may be withdrawn by check within thirty days, although 
the bank may have the right, by written contract or otherwise, to require 
a withdrawal notice of not less than thirty days. 

Nor may any certificate of deposit be considered a time certificate if 
any part of the amount represented by it is subject to check or may be 
withdrawn without the presentation of the certificate for proper indorse- 
ment. 

While savings accounts may at any time, by the action of the bank, 
be converted into time deposits, they are, nevertheless, ordinarily with- 
drawable on demand. In the absence of any statutory limitation upon 
the sum which may be received by a bank from any one individual as a 
savings account, the board has no authority, for the purpose of calcu- 
lating reserves, to impose any such limitation, but it feels strongly that 
in the interest of both the member banks and the Federal Reserve Sys- 
tem, the broad provisions of the act in respect to time deposits, savings 
accounts and certificates of deposit, should not be made the means of 
any large general reduction of reserves by a transfer to those forms of 
deposits which are in substance demand deposits ; and it is the purpose 
of the board to countenance or permit a reduction of reserves to five per 
cent, only on deposits which are, in fact as well as in form, entitled to 
such reduction within the spirit of the act. 

Banks carrying savings accounts must record them in separate ledgers 
which do not contain ordinary checking accounts or other items. Open 
time accounts and time certificates of deposit should also be carried in 



APPENDIX 609 

separate ledgers, but if carried in the same ledger with current check- 
ing accounts they must be grouped together so as to be readily distin- 
guished from the latter. 

The board desires to make it clear that the act requires the full re- 
serve, at the rate prescribed for demand deposits, to be carried against 
all savings accounts and all time deposits whether on open account or 
certificate, which are subject to check or which the bank has been notified 
are to be withdrawn within thirty days. 



Regulation E, Series of 1915, Superseding Regulation No. 7 of 1914 

January 15, 1915 
Time Deposits and Savings Accounts 

Section 19 of the Federal Reserve Act provides, in part, as follows: 
"Demand deposits, within the meaning of this act, shall comprise all 
deposits payable within thirty days, and time deposits shall comprise all 
deposits payable after thirty days, and all savings accounts and certifi- 
cates of deposit which are subject to not less than thirty days' notice 
before payment." 

Time Deposits, Open Accounts 

The term "time deposits, open accounts" shall be held to include all 
accounts, not evidenced by certificates of deposit or savings pass-books, 
in respect to winch a written contract is entered into with the depositor 
at the time the deposit is made that neither the whole nor any part of 
such deposit may be withdrawn by check or otherwise except on a given 
date or on written notice given by the depositor a certain specified num- 
ber of days in advance, in no case less than thirty days. 

Savings Accounts 

The term "savings accounts" shall be held to include those accounts 
of the bank in respect to which, by its printed regulations, accepted by 
the depositor at the time the account is opened — 

(a) The pass-book, certificate, or other similar form of receipt must 
be presented to the bank whenever a deposit or withdrawal is made, and 

(b) The depositor may at any time be required by the bank to give 
notice of an intended withdrawal not less than thirty days before a with- 
drawal is made. 

Time Certificates of Deposit 

A "time certificate of deposit" is defined as an instrument evidencing 
the deposit with a bank, either with or without interest, of a certain sum 
specified on the face of the certificate, payable in whole or in part to the 
depositor or on his order — 



610 THE PRACTICAL WORK OF A BANK 

(a) On a certain date, specified on the certificate, not less than 
thirty days after the date of the deposit, or 

(b) After the lapse of a certain specified time subsequent to the 
date of the certificate, in no case less than thirty days, or 

(c) Upon written notice given a certain specified number of days, 
not less than thirty days before the date of repayment, and 

(d) In all cases only upon presentation of the certificate at each 
withdrawal for proper indorsement or surrender. 

Circular No. 5. Series 1915 

Bankers' Acceptances 

February 8, 1915 

"Acceptances" are dealt with in the Federal Reserve Act in two differ- 
ent sections — sections IS and 14. Section 13 deals with the "acceptance" 
as one of the forms of paper in the discount of which Federal Reserve 
Banks may engage, restricting the discount of acceptances to such as bear 
the indorsement of a member bank. Section 14 invests the Federal Reserve 
Banks, under regulations to be prepared by the Federal Reserve Board, 
with power to engage in open-market operations, of which the "banker's 
acceptance" is one of the most important. 

Careful study has led the Federal Reserve Board to the conclusion 
that, at any rate in the first stages, so far as practicable, priority should 
be given to operations under section 13. The acceptance is still in its 
infancy in the field of American banking. How rapid its development wilj 
be cannot be foretold ; but the development itself is certain. Opportunity 
is given by the Federal Reserve Act to assist the movement in this new 
direction; the present regulations are to be regarded as a first step and 
will be extended as circumstances and a reasonable regard for the other 
uses and needs of the credit facilities of the Federal Reserve System may 
warrant. 

It is believed that it would unduly restrict the development of the 
acceptance business to keep it altogether confined within the provisions of 
section 13, which require that acceptances, in order to be eligible for redis- 
count at a Federal Reserve Bank, must bear the indorsement of a member 
bank; particularly in view of the further fact that the law limits the 
amount of acceptances which may be taken with the indorsement of a 
member bank to 50 per centum of its paid-in capital and surplus. Having 
found it necessary to extend the scope of dealing in acceptances beyond 
these limits, the Board has exercised the authority conferred upon it by 
section 14, and has formulated regulations covering the purchase of accept- 
ances without invariably requiring the indorsement of a member bank. 

The acceptance is the standard form of paper in the world discount 
market, and both on this account and because of its acknowledged liquidity 
universally commands a preferential rate. By reason of its being readily 
marketable it is widely regarded as a most desirable paper in the sec- 
ondary reserves of banks and will help to provide an effective substitute 
for the "call loan." Its growth, however, will depend upon the ability of 
the American market to adjust its rates effectively to those prevailing in 
other markets for paper of this class. 



APPENDIX 611 

Recognizing these facts, the Federal Reserve Board has determined 
to allow the Federal Reserve Banks latitude in fixing rates for acceptances : 
Federal Reserve Banks may, from time to time, submit for the approval 
of the Board maximum and minimum rates within which they desire to 
be authorized to deal in acceptances; within such limits, and subject to 
such modifications as may be imposed by the Board, Federal Reserve 
Banks will be allowed to establish the rates at which they will deal in 
acceptances. 

The Board believes it to be in accordance with the spirit of the Act to 
accord preferential treatment to acceptances bearing the indorsement of 
member banks, offered for rediscount under section 13 — even to the point 
of allowing lower rates for such acceptances, inasmuch as, under the terms 
of this section, such acceptances are available as collateral against the 
issue of Federal reserve notes ; and the Board will sanction a slight pref- 
erential in favor of acceptances bearing the indorsement of member banks. 

When acceptances bearing the indorsement of member banks are not 
obtainable in adequate amount or upon satisfactory terms, Federal Reserve 
Banks desiring to purchase acceptances should restrict themselves, as far 
as possible, to such acceptances as bear some other responsible signature 
(other than that of the drawer and the acceptor), and preferably that of 
a bank or banker. 

Regulation D, Series of 1915 

I. Definition. — In this regulation the term "acceptance" is denned as 
a draft or bill of exchange drawn to order, having a definite maturity and 
payable in dollars, in the United States, the obligation to pay which has 
been accepted by an acknowledgment written or stamped and signed across 
the face of the instrument by the party on whom it is drawn ; such agree- 
ment to be to the effect that the acceptor will pay at maturity according 
to the tenor of such draft or bill without qualifying conditions. 

II. Statutory Requirements Under Sections 13 and 14. — Section 13 
of the Federal Reserve Act provides that — 

(a) Any Federal Reserve Bank may discount acceptances — 

(1) Which are based on the importation or exportation of 
goods ; 

(2) Which have a maturity at time of discount of not more 
than three months ; and 

(3) Which are indorsed by at least one member bank. 

(b) The amount of acceptances so discounted shall at no time exceed 
one-half the paid-up capital stock and surplus of the bank for which the 
rediscounts are made. 

(c) The aggregate of notes and bills bearing the signature or indorse- 
ment of any one person, company, firm, or corporation rediscounted for 
any one bank shall at no time exceed ten per centum of the unimpaired 
capital and surplus of said bank ; but this restriction shall not apply to the 
discount of bills of exchange drawn in good faith against actually existing 
values. 

Section 14 of the Federal Reserve Act permits Federal Reserve Banks, 
under regulations to be prescribed by the Federal Reserve Board, to pur- 
chase and sell in the open market bankers' acceptances, with or without 
the indorsement of a member bank. 



612 THE PRACTICAL WORK OF A BANK 

III. "Eligibility." — The Federal Reserve Board has determined that, 
until further order, to be eligible for discount under section 13, by Fed- 
eral Reserve Banks, at the rates to be established for bankers' acceptances: 

(a) Acceptances must comply with the provisions of Paragraph II 
(a), (b), (c) hereof; 

(b) Acceptances must have been made by a member bank, nonmem- 
ber bank, trust company, or by some private banking firm, person, com- 
pany, or corporation engaged in the business of accepting or discounting. 
Such acceptances will hereafter be referred to as "bankers" '" accept- 
ances j 1 

(c) A banker's acceptance must be drawn by a commercial, indus- 
trial, or agricultural concern (that is, some person, firm, company, or cor- 
poration,) directly connected with the importation or exportation of the 
goods involved in the transaction in which the acceptance originated ; 

(d) A banker's acceptance must bear on its face, or be accompanied 
by evidence in form satisfactory to a Federal Reserve Bank, that it orig- 
inated in an actual bona fide sale or consignment involving the importation 
or exportation of goods. Such evidence may consist of a certificate on or 
accompanying the acceptance to the following effect: 

This acceptance is based upon a transaction involving the importation or 
exportation of goods. Reference No. . Name of acceptor . 

(e) Bankers' acceptances, other than those of member banks, shall be 
eligible only after the acceptors shall have agreed in writing to furnish 
to the Federal Reserve Banks of their respective districts, upon request, 
information concerning the nature of the transaction against which accept- 
ances certified or bearing evidence under III (d) hereof) have been made; 

(f) A bill of exchange accepted by a "banker" may be considered as 
drawn in good faith against actually existing values," under II (c) hereof, 
when it is secured by a lien on or by transfer of title to the goods to be 
transported ; 

(g) Except in so far as they may be secured by a lien on or by 
transfer of the title to the goods to be transported, the bills of any person, 
firm, company, or corporation, drawn on and accepted by any private 
banking firm, person, company, or corporation (other than a bank or trust 
company) engaged in the business of discounting or accepting, and dis- 
counted by a Federal Reserve Bank, shall at no time exceed in the aggrer 
gate a sum equal to five per centum of the paid-in capital of such Federal 
Reserve Bank. 

(h) The aggregate of acceptances of any private banking firm, per- 
son, company, or corporation (other than a bank or trust company) en- 
gaged in the business of discounting or accepting, discounted or purchased 
by a Federal Reserve Bank, shall at no time exceed a sum equal to twenty- 
five per centum of the paid-in capital of such Federal Reserve Bank. 

To be eligible for purchase by Federal Reserve Banks under section 14, 
bankers' acceptances must comply with all requirements and be subject to 
all limitations hereinbefore stated, except that they need not be indorsed 
by a member bank: Provided, however, That no Federal Reserve Bank 
shall purchase the acceptance of a "banker" other than a member bank 
which does not bear the indorsement of a member bank, unless it has first 

i Drafts and bills of exchange eligible for rediscount under Section 13, other 
than "bankers' " acceptances, have been dealt with by Regulation B, series of 1915. 



APPENDIX 613 

secured a satisfactory statement of the financial condition of the acceptor 
in form to be approved by the Federal Reserve Board. 

IV. Policy as to Purchases. — While it would appear impracticable 
to fix a maximum sum or percentage up to which Federal Reserve Banks 
may invest in bankers' acceptances, both under section 13 and section 14, 
it will be necessary to watch carefully the aggregate amount to be held 
from time to time. In framing their policy with respect to transactions in 
acceptances, Federal Reserve Banks will have to consider, not only the 
local demands to be expected from their own members, but also require- 
ments to be met in other districts. The plan to be followed must in each 
case adapt itself to the constantly varying needs of the country. 

Circular No. 11. Series 1915 

(Supersedes No. 5 of 1915) 

Bankers' Acceptances 

April 2, 1915 

An amendment of the Federal Reserve Act, approved March 3, 1915, 
at length in Circular No. 12. 

This amendment granting the right to Federal Reserve Banks to dis- 
count acceptances of member banks based upon importation or exportation 
of goods beyond fifty per cent, up to one hundred per cent, of their unim- 
paired capital stock and surplus, with the authority of the Federal Re- 
serve Board, has made it necessary to issue a new regulation on the 
subject of Bankers' Acceptances. The Federal Reserve Board, therefore, 
issues this circular which is a reprint of and is to supersede Circular No. 
5, Series of 1915. A new regulation is hereto appended which is to super- 
sede Regulation D, Series of 1915, and which contains some alterations 
that experience has proved desirable. 

"Acceptances" are dealt with in the Federal Reserve Act in two dif- 
ferent sections — sections 13 and 14. Section 13 deals with the "accept- 
ance" as one of the forms of paper in the discount of which Federal 
Reserve Banks may engage, restricting the discount of acceptances to 
such as bear the indorsement of a member bank. Section 14 invests the 
Federal Reserve Banks, under regulations to be prepared by the Federal 
Reserve Board, with power to engage in open-market operations, of which 
the 'bankers' acceptance" is one of the most important. 

Careful study has led the Federal Reserve Board to the conclusion 
that, at any rate in the first stages, so far as practicable, priority should 
be given to operations under section 13. The acceptance is still in its 
infancy in the field of American banking. How rapid its development 
will be cannot be foretold ; but the development itself is certain. Oppor- 
tunity is given by the Federal Reserve Act to assist the movement in this 
new direction; the present regulations are to be regarded as a first step 
and will be extended as circumstances and a reasonable regard for the 
other uses and needs of the credit facilities of the Federal Reserve System 
may warrant. 

It is believed that it would unduly restrict the development of the 
acceptance business to keep it altogether confined within the provisions 
of section 13, which require that acceptances, in order to be eligible for 



614 THE PRACTICAL WORK OF A BANK 

rediscount at a Federal Reserve Bank, must bear the indorsement of a 
member bank. Having found it necessary to extend the scope of dealings 
in acceptances beyond these limits, the Board has exercised the authority 
conferred upon it by section 14, and has formulated regulations covering 
the purchase of acceptances without invariably requiring the indorsement 
of a member bank. 

The acceptance is the standard form of paper in the world discount 
market, and both on this account and because of its acknowledged liquidity 
universally commands a preferential rate. By reason of its being market- 
able it is widely regarded as a most desirable paper in the secondary 
reserves of banks and will help to provide an effective substitute for the 
"call loan." Its growth, however, will depend upon the ability of the 
American market to adjust its rates effectively to those prevailing in other 
markets for paper of this class. 

Recognizing these facts, the Federal Reserve Board has determined to 
allow the Federal Reserve Banks latitude in fixing rates for acceptances: 
Federal Reserve Banks may, from time to time, submit for the approval 
of the Board maximum and minimum rates within which they desire to be 
authorized to deal in acceptances ; within such limits, and subj ect to such 
modifications as may be imposed by the Board, Federal Reserve Banks will 
be allowed to establish the rates at which they will deal in acceptances. 

The Board believes it to be in accordance with the spirit of the Act 
to accord preferential treatment to acceptances bearing the indorsement 
of member banks, offered for rediscount under section IS — even to the 
point of allowing lower rates for such acceptances, inasmuch as, under 
the terms of this section, such acceptances are available as collateral 
against the issue of Federal Reserve notes; and the Board will sanction 
a slight preferential in favor of acceptances bearing the indorsement of 
member banks. 

When acceptances bearing the indorsement of member banks are not 
obtainable in adequate amount or upon satisfactory terms, Federal Re- 
serve Banks desiring to purchase acceptances should restrict themselves, 
as far as possible, to such acceptances as bear some other responsible 
signature (other than that of the drawer and the acceptor), and preferably 
that of a bank or banker. 

Regulation J. Series 1915 
(Superseding Regulation D. of 1915) 

I. Definition. — In this regulation the term "acceptance" is denned as 
draft or bill of exchange drawn to order, having a definite maturity, and 
payable in dollars, in the United States, the obligation to pay which has 
been accepted by an acknowledgment written or stamped and signed 
across the face of the instrument by the party on whom it is drawn ; such 
agreement to be to the effect that the acceptor will pay at maturity accord- 
ing to the tenor of such draft or bill without qualifying conditions. 

II. Statutory Requirements Under Sections 13 and 14. — Section IS 
of the Federal Reserve Act as amended provides that — 

(a) Any Federal Reserve Bank may discount acceptances — 

(1) Which are based on the importation or exportation of 
goods ; 



APPENDIX 615 

(2) Which have a maturity at time of discount of not more 

than three months; and 

(3) Which are indorsed by at least one member bank. 

(b) The amount of acceptances so discounted shall at no time exceed 

one-half the paid-up capital stock and surplus of the bank 
for which the rediscounts are made, except by authority of 
the Federal Reserve Board and of such general regulations 
as said Board may prescribe, but not to exceed the capital 
stock and surplus of such bank. 

(c) The aggregate of notes and bills bearing the signature or in- 

dorsement of any one person, company, firm, or corporation 
rediscounted for any one bank shall at no time exceed ten 
per centum of the unimpaired capital and surplus of said 
bank; but this restriction shall not apply to the discount of 
bills of exchange drawn in good faith against actually exist- 
ing values. 
Section 14 of the Federal Reserve Act permits Federal Reserve Banks, 
under regulations to be prescribed by the Federal Reserve Board, to pur- 
chase and sell in the open market bankers' acceptances, with or without 
the indorsement of a member bank. 

III. Ruling. — The Federal Reserve Board, exercising its power of 
regulation with reference to paragraph II (b) hereof, rules as follows: 

Any Federal Reserve Bank shall be permitted to discount for any 
member bank "bankers' acceptances" as hereinafter defined up to an 
amount not to exceed the capital stock and surplus of the bank for which 
the rediscounts are made. 

IV. Eligibility. — The Federal Reserve Board has determined that, 
until further order, to be eligible for discount under section 1 3, by Federal 
Reserve Banks, at the rates to be established for bankers' acceptances: 

(a) Acceptances must comply with the provisions of Paragraph II 
(a), (b), (c) hereof; 

(b) Acceptances must have been made by a member bank, nonmem- 
ber bank, trust company, or by some private banking firm, person, com- 
pany, or corporation engaged in the business of accepting or discounting. 
Such acceptances will hereafter be referred to as "bankers' " accept- 
ances ; 1 

(c) A banker's acceptance must be drawn by a commercial, indus- 
trial, or agricultural concern (that is, some person, firm, company, or 
corporation) directly connected with the importation or exportation of 
the goods involved in the transaction in which the acceptance originated, 
or by a "banker." In the latter case the goods, the importation or ex- 
portation of which is to be financed by the acceptance, must be clearly 
specified in the agreement with or the letter of advice to the acceptor. 
The bill must not be drawn or renewed after the goods have been sur- 
rendered to the purchaser or consignee. 

(d) A banker's acceptance must bear on its face or be accompanied 
by evidence in form satisfactory to a Federal Reserve Bank that it origi- 
nated in an actual bona fide sale or consignment involving the importation 

i Drafts and bills of exchange eligible for rediscount under section 13, other 
than "bankers' " acceptances, have been dealt with by Regulation B, series of 1915 : 



616 THE PRACTICAL WORK OF A BANK 

or exportation of goods. Such evidence may consist of a certificate 

on or accompanying the acceptance to the following effect: 

This acceptance is based upon a transaction involving the importation or 
exportation of goods. Reference No. . Name of acceptor . 

(e) Bankers' acceptances, other than those of member banks, shall 
be eligible only after the acceptors shall have agreed in writing to fur- 
nish to the Federal Reserve Banks of their respective districts, upon 
request, information concerning the nature of the transactions against 
which acceptances (certified or bearing evidence under IV (d) hereof) 
have been made. 

(f) A bill of exchange accepted by a "banker" may be considered 
as drawn in good faith against "actually existing values," under II (c) 
hereof, when the acceptor is secured by a lien on or by transfer of title 
to the goods to be transported; or, in case of release of the goods before 
payment of the acceptance, by the substitution of other adequate security ; 

(g) Except in so far as they may be secured by a lien on or by 
transfer of the title to the goods to be transported, as under (f), the 
bills of any person, firm, company, or corporation, drawn on and ac- 
cepted by any private banking firm, person, company, or corporation 
(other than a bank or trust company) engaged in the business of dis- 
counting and accepting, and discounted by a Federal Reserve Bank, shall 
at no time exceed in the aggregate a sum equal to five per centum of the 
paid-in capital of such Federal Reserve Bank; 

(h) The aggregate of acceptances of any private banking firm, per- 
son, company, or corporation (other than a bank or trust company) en- 
gaged in the business of discounting or accepting, discounted or pur- 
chased by a Federal Reserve Bank, shall at no time exceed a sum equal 
to twenty-five per centum of the paid-in capital of such Federal Reserve 
Bank. 

To be eligible for purchase by Federal Reserve Banks under section 
14, bankers' acceptances must comply with all requirements and be sub- 
ject to all limitations hereinbefore stated, except that they need not be 
indorsed by a member bank : Provided, however, That no Federal Reserve 
Bank shall purchase the acceptance of a "banker" other than a member 
bank which does not bear the indorsement of a member bank, unless a 
Federal Reserve Bank has first secured a satisfactory statement of the 
financial condition of the acceptor in form to be approved by the Federal 
Reserve Board. 

V. Policy as to Purchases. — While it would appear impracticable to 
fix a maximum sum or percentage up to which Federal Banks may invest 
in bankers' acceptances, both under section 13 and section 14, it will be 
necessary to watch carefully the aggregate amount to be held from time 
to time. In framing their policy with respect to transactions in accept- 
ances, Federal Reserve Banks will have to consider not only the local de- 
mands to be expected from their own members, but also requirements 
to be met in other districts. The plan to be followed must in each case 
adapt itself to the constantly varying needs of the country. 



APPENDIX 617 

Circular 12. Series 1915 

Acceptance by Member Banks 

April 2, 1915 

By act of Congress approved March 3, 1915, section 13 (paragraphs 
3, 4 and 5 of the Federal Reserve Act) was amended and reenacted so 
as to read as follows: 

Any Federal Reserve Bank may discount acceptances which are 
based on the importation or exportation of goods and which have, a ma- 
turity at time of discount of not more than three months and indorsed 
by at least one member bank. The amount of acceptances so discounted 
shall at no time exceed one-half the paid-up and unimpaired capital stock 
and surplus of the bank for which the rediscounts are made, except by 
authority of the Federal Reserve Board, under such general regulations 
as said board may prescribe, but not to exceed the capital stock and 
surplus of such banks. 

The aggregate of such notes and bills bearing the signature or indorse- 
ment of any one person, company, firm, or corporation rediscounted for 
any one bank shall at no time exceed ten per centum of the unimpaired 
capital and surplus of said bank; but this restriction shall not apply 
to the discount of bills of exchange drawn in good faith against actually 
existing values. 

Any member bank may accept drafts or bills of exchange drawn upon 
it and growing out of transactions involving the importation or exporta- 
tion of goods having not more than six months' sight to run; but no 
bank shall accept such bills to an amount equal at any time in the aggre- 
gate to more than one-half of its paid-up and unimpaired capital stock and 
surplus, except by authority of the Federal Reserve Board, under such 
general regulations as said board may prescribe, but not to exceed the 
capital stock and surplus of such bank, and such regulations shall apply 
to all banks alike, regardless of the amount of capital stock and surplus. 

In order to give effect to the above amendment of the law, the Fed- 
eral Reserve Board issues the appended Regulation K, series of 1915, 
stating the conditions under which member banks may accept, up to one 
hundred per cent, of their capital and surplus, drafts or bills of exchange 
growing out of transactions involving the importation or exportation of 
goods and having not more than six months' sight to run. 

Regulation K. Series 1915 

Any member bank may accept drafts or bills of exchange drawn upon 
it, having not more than six months' sight to run and growing out of 
transactions involving the importation or exportation of goods up to an 
amount not exceeding the capital and surplus of such bank, provided 
that— 

(1) Every such bank shall possess an unimpaired surplus of not 
less than twenty per cent, of its paid-in capital; 

(2) Every such bank shall file formal application with the Federal 
Reserve Bank of its district, which shall report to the Federal Reserve 
Board upon the standing of such applicant, stating also whether the 
business and banking conditions prevailing in the district warrant the 
granting of such applications in said district. 



618 THE PRACTICAL WORK OF A BANK 

(3) Every such application shall first have been approved by the 
Federal Reserve Board. 

Approval of any such application may be rescinded, and modifica- 
tions of this regulation may be made, by the Federal Reserve Board 
upon notice of ninety days to the bank or banks thereby affected. 

Circular 16. Series 1915 

July 15, 1915. 

Bills of Exchange Drawn Against Sales of Goods and Accepted by 
Purchasers, Hereinafter Referred to as "Trade Acceptances" 

By Regulation B, Series of 1915, the Board has prescribed the con- 
ditions upon which commercial paper may be rediscounted with Federal 
Reserve Banks, and, by Regulation J, Series of 1915, rules have been 
promulgated covering operations in bankers' acceptances. The attached 
regulation is to deal with "trade acceptances" as a distinct class of com- 
mercial paper, for which the Board if ready to approve the establishment 
of a discount rate somewhat lower than that applicable to other commer- 
cial paper. 

These trade acceptances are more particularly defined in the appended 
Regulation P, Series of 1915, and in promulgating it the Board ex- 
presses the belief that it will considerably enlarge the scope of service 
of Federal Reserve Banks and, incidentally, assist in developing a class 
of "double-name" paper, which has shown itself in so many countries a 
desirable form of investment and an important factor in modern com- 
mercial banking systems. 

Regulation P. Series 1915 

July 15, 1915 

I. Definition. — In this regulation the term "trade acceptance" is de- 
fined as a bill of exchange of the character hereinafter described, drawn 
to order, having a definite maturity and payable in dollars in the United 
States, the obligation to pay which has been accepted by an acknowledg- 
ment, written or stamped, and signed across the face of the instrument 
by the company, firm, corporation, or person upon whom it is drawn; 
such agreement to be to the effect that the acceptor will pay at maturity, 
according to its tenor, such draft or bill without qualifying conditions. 

II. Character or Paper Eligible. — A trade acceptance to be eligible 
for rediscount, under section 13, with a Federal Reserve Bank at the 
rate to be established for trade acceptances. 

(a) Must be indorsed by a member bank, accompanied by waiver of 
demand notice and protest. 

(b) Must have a maturity at the time of discount of not more than 
ninety days. * 

(c) Must be accepted by the purchaser of goods sold to him by the 
drawer of the bill, and the bill must have been drawn against indebted- 
ness expressly incurred by the acceptor in the purchase of such goods. 

III. Method of Certifying Eligibility. — A trade acceptance must 
Dear on its face, or be accompanied by, evidence in form satisfactory to 
the Federal Reserve Bank, that it was drawn by the seller of the goods 



APPENDIX 619 

on the purchaser of such goods. Such evidence may consist of a cer- 
tificate on or accompanying the acceptance, to the following effect: "The 
obligation of the acceptor of this bill arises out of the purchase of goods 
from the drawer." Such certificate may be accepted by the Federal Re- 
serve Bank as sufficient evidence; provided, however, that the Federal 
Reserve Bank, in its discretion, may inquire into the exact nature of the 
transaction underlying the acceptance. 

Circular 17. Series 1915 
Commodity Paper 
September 3, 1915 

In Regulation B, Series of 1915, the Board has established the policy 
of encouraging transactions of Federal Reserve Banks in trade accept- 
ances and in commodity paper by admitting these kinds of paper to be 
rediscounted by Federal Reserve Banks with the waiver of the particular 
requirements with reference to statements. 

In pursuance of this policy, the Board has issued a regulation (P, 
series of 1915) laying down the conditions under which trade acceptances 
may be discounted by Federal Reserve Banks at a special rate to be 
published for this kind of paper. In further pursuance of the same 
policy, the Board in the appended regulation (Q, series of 1915) has 
authorized special rates on commodity paper. 

It is expected that this new class of paper with its special rates 
will prove of particular efficacy in meeting the seasonal demands for 
credit facilities in the crop-producing districts, and the Board in author- 
izing these special rates will rely on the Federal Reserve Banks to adopt 
a policy which will result in securing for the ultimate borrowers the ex- 
tension of credit on moderate terms by member banks. As in the case of 
trade acceptances, the rates to be established for commodity paper may 
be expected to be lower than the rates established for ordinary commer- 
cial paper. It will be left to the discretion of the Federal Reserve Banks 
to determine whether different rates should be established for trade 
acceptances and commodity paper. Uniformity of rate may appear to 
be desirable in districts where there are transactions in both kinds of 
paper. 

Rugulation Q. Series 1915 

Commodity Paper 

September 3, 1915 

In this regulation the term "commodity paper" is defined as a note, 
draft, or bill of exchange secured by warehouse terminal receipts, or 
shipping documents covering approved and readily marketable, nonper- 
ishable staples properly insured. 

Commodity paper, to be eligible for discount by a Federal Reserve 
Bank under section 13, at the special rates hereby authorized to be 
established for commodity paper below the usual commercial rates, must 
(a) comply with all the requirements of Regulation B, series of 1915, 
paragraphs I and II, or with the requirements of Regulation C, series 
of 1915; (b) and be paper on which the rate of interest or discount, in- 



620 THE PRACTICAL WORK OF A BANK 

eluding commission charged the maker, does not exceed six per cent, per 
annum, and also (c) comply with such regulations as may be issued by 
Federal Reserve Banks covering requirements as to warehouse or termi- 
nal receipts, shipping documents, insurance, etc., adapted to the par- 
ticular needs of its district as a condition of the special rate herein au- 
thorized. 

Federal Reserve Banks are now authorized to submit rates for the 
discount of commodity paper in accord with this regulation for review by 
the Board. 

Circular 18. Series 1915 

(Supersedes No. 11 of 1915) 

Bankers' Acceptances 

September 7, 1915 

In its circular of February 8, 1915, accompanying publication of its. 
first comprehensive regulation (Regulation D, series of 1915) on accept- 
ances, the Board used the following language: 

"The acceptance is still in its infancy in the field of American bank- 
ing. How rapid its development will be cannot be foretold; but the de- 
velopment itself is certain. Opportunity is given by the Federal Re- 
serve Act to assist the movement in this new direction; the present regu- 
lations are to be regarded as a first step and will be extended as circum- 
stances and a reasonable regard for the other uses and needs of the credit 
facilities of the Federal Reserve System may warrant." 

In pursuance of this policy the Board, after prolonged and careful 
consideration of the matter in all its phases, has reached the conclusion 
that the time is at hand for an extension of its acceptance regulation, as 
provided in the appended regulation (R). 

Regulation R. Series 1915 
(Superseding J. of 1915) 
Bankers' Acceptances 
September 7, 1915. 

I. Definition. — In this regulation the term "acceptance" is defined 
as a draft or bill of exchange drawn to order, having a definite maturity, 
and payable in dollars, in the United States, the obligation to pay which 
has been accepted by an acknowledgment written or stamped and signed 
across the face of the instrument by the party on whom it is drawn ; such 
agreement to be to the effect that the acceptor will pay at maturity 
according to the tenor of such draft or bill without qualifying conditions. 

II. Statutory Requirements Under Sections 13 and 14. — Section IS 
of the Federal Reserve Act as amended provides that — 

(a) Any Federal Reserve Bank may discount acceptances — 

(1) Which are based on the importation or exportation of 

goods ; 

(2) Which have a maturity at time of discount of not more 

than three months; and 

(3) Which are indorsed by at least one member bank.. 



APPENDIX 621 

(b) The amount of acceptances so discounted shall at no time ex- 

ceed one-half the paid-up capital stock and surplus of the 
bank for which the rediscounts are made, except by author- 
ity of the Federal Reserve Board and of such general regu- 
lations as said Board may prescribe, but not to exceed the 
capital stock and surplus of such bank. 

(c) The aggregate of notes and bills bearing the signature or in- 

dorsement of any one person, company, firm, or corporation 
rediscounted for any one bank shall at no time exceed ten 
per cent, of the unimpaired capital and surplus of said bank ; 
but this restriction shall not apply to the discount of bills 
of exchange drawn in good faith against actually existing 
values. 
Section 14 of the Federal Reserve Act permits Federal Reserve Banks, 
under regulations to be prescribed by the Federal Reserve Board, to pur- 
chase and sell in the open market bankers' acceptances, with or without 
the indorsement of a member bank. 

III. Ruling. — The Federal Reserve Board, exercising its power of 
regulation with reference to Paragraph II (b) hereof, rules as follows: 

Any Federal Reserve Bank shall be permitted to discount for any 
member bank "bankers' acceptances" as hereinafter defined up to an 
amount not to exceed the capital stock and surplus of the bank for which 
the rediscounts are made. 

IV. Eligibility. — The Federal Reserve Board has determined that, 
until further order, to be eligible for discount under section 13, by 
Federal Reserve Banks, at the rates to be established for bankers' ac- 
ceptances : 

(a) Acceptances must comply with the provisions of Paragraph II 
(a), (b), (c) hereof; 

(b) Acceptances must have been made by a member bank, nonmem- 
ber bank, trust company, or by some firm, person, company, or corpora- 
tion engaged in the business of accepting or discounting. Such accept- 
ances will hereafter be referred to as "bankers' " acceptances j 1 

(c) A banker's acceptance must be drawn by a purchaser or seller 
or other person, firm, company, or corporation directly connected with 
the importation or exportation of the goods involved in the transaction 
in which the acceptance originated, or by a "banker." The bill must 
not be renewed after the goods have been surrendered to the purchaser 
or consignee, except for such reasonable period as may have been agreed 
upon-at the time of the opening of the credit as a condition incidental to 
the importation or exportation involved, provided that the bill must 
not contain or be subject to any condition whereby the holder thereof 
is obligated to renew the same at maturity. 

(d) A banker's acceptance must bear on its face or be accompanied 
by evidence in form satisfactory to a Federal Reserve Bank that it origi- 
nated in, or is based upon, a transaction or transactions involving the 
importation or exportation of goods. Such evidence may consist of a cer- 
tificate on or accompanying the acceptance to the following effect: 

i Drafts and bills of exchange eligible for rediscount under Section 13, other 
than "bankers' " acceptances, have been dealt with by Regulation B, series of 1915. 



622 THE PRACTICAL WORK OF A BANK 

This acceptance is based upon a transaction involving the importation or 
exportation of goods. Reference No. . Name of acceptor . 

(e) Bankers' acceptances, other than those of member banks, shall 
be eligible only after the acceptors shall have agreed in writing to furnish 
to the Federal Reserve Banks of their respective districts, upon request, 
information concerning the nature of the transactions against which ac- 
ceptances (certified or bearing evidence under IV (d) hereof) have been 
made. 

(f) A bill of exchange accepted by a "banker" may be considered 
as drawn in good faith against "actually existing values," under II (c) 
hereof, when the acceptor is secured by a lien on or by transfer of title 
to the goods to be transported or by other adequate security ; 

(g) Except in so far as they may be drawn in good faith against 
actually existing values, as under (f), the bills of any one drawer drawn 
on and accepted by any firm, person, company, or corporation (other than 
a bank or trust company) engaged in the business of discounting and 
accepting, and discounted by a Federal Reserve Bank, shall at no time 
exceed in the aggregate a sum equal to a definite percentage of the paid- 
in capital of such Federal Reserve Bank; such percentage to be fixed 
from time to time by the Federal Reserve Board. 

(h) The aggregate of acceptances of any firm ; person, company, or 
corporation (other than a bank or trust company) engaged in the business 
of discounting or accepting, discounted or purchased by a Federal Re- 
serve Bank, shall at no time exceed a sum equal to a definite percentage 
of the paid-in capital of such Federal Reserve Bank; such percentage to 
be fixed from time to time by the Federal Reserve Board. 

To be eligible for purchase by Federal Reserve Banks under section 
14, bankers' acceptances must comply with all requirements and be sub- 
ject to all limitations hereinbefore stated, except that they need not be 
indorsed by a member bank: Provided, however, That no Federal Re- 
serve Bank shall purchase the acceptance of a"banker" other than a mem- 
ber bank which does not bear the indorsement of a member bank, unless 
a Federal Reserve Bank has first secured a satisfactory statement of 
the financial condition of the acceptor in form to be approved by the 
Federal Reserve Board. 

V. Policy as to Purchases. — While it would appear impracticable 
to fix a maximum sum or percentage up to which Federal Reserve Banks 
may invest in bankers' acceptances, both under section 13 and section 14, 
it will be necessary to watch carefully the aggregate amount to be held 
from time to time. In framing their policy with respect to transactions 
in acceptances, Federal Reserve Banks will have to consider not only 
the local demands to be expected from their own members, but also re- 
quirements to be met in other districts. The plan to be followed must 
in each case adapt itself to the constantly varying needs of the country. 

Circular 19. Series 1915 

November 29, 1915 

Open Market Purchases of Bankers' Acceptances 

In Regulation R, series of 1915, relating to the discount of bankers' 
acceptances, the Federal Reserve Board provided for the purchase in the 



APPENDIX 623 

open market of bankers' acceptances based on the importation or expor- 
tation of goods. 

The appended regulation is intended to cover the purchase in the open 
market, not only of bankers' acceptances based on the importation or ex- 
portation of goods, heretofore covered by Regulation R, but also the 
purchase of certain domestic acceptances authorized by certain State 
laws. 

The Federal Reserve Board has determined that bankers' domestic 
acceptances, as defined and restricted in the appended regulation, are a 
very useful type of paper, and the Board has not felt justified, therefore, 
when admitting State banks and trust companies into the Federal Reserve 
System, in stipulating that such domestic acceptances should not be con- 
tinued under reasonable limitations as a part of their business. 

Inasmuch as the making of these domestic acceptances has been rec- 
ognized by the Board as the exercise of a legitimate banking function 
when authorized by law, it was thought that they are of the character to 
make desirable investments for Federal Reserve Banks. The Board has, 
therefore, issued the appended regulation, not only embodying the author- 
ity given in Regulation R, series of 1915, to purchase bankers' accept- 
ances based on the importation or exportation of goods, but also authoriz- 
ing the purchase of bankers' domestic acceptances within the limits pre- 
scribed in the appended regulation. 

Regulation S, Series of 1915 
November 29, 1915 

I. Definition. — In this regulation the term "acceptance" is defined 
as a draft or bill of exchange drawn to order, having a definite maturity, 
and payable in dollars, in the United States, the obligation to pay which 
has been accepted by an acknowledgment written or stamped and signed 
across the face of the instrument by the party on whom it is drawn; such 
agreement to be to the effect that the acceptor will pay at maturity accord- 
ing to the tenor of such draft or bill without qualifying conditions. 

II. Statutory Requirements. — Section 14 of the Federal Reserve Act 
permits Federal Reserve Banks, under regulations to be prescribed by 
the Federal Reserve Board, to purchase and sell in the open market 
bankers' acceptancies with or without the indorsement of a member bank. 

III. Eligibility. — The Federal Reserve Board has determined that, 
until further notice, to be eligible for purchase under section 14 at the 
rates to be established for the purchase of bankers' domestic and foreign 
acceptances : 

(a) Acceptances must have been made by a bank or trust company, 
or by some firm, person, company, or corporation engaged in the business 
of accepting or discounting. Such acceptances will hereafter be referred 
to as "bankers' acceptances"; 

(b) A banker's foreign acceptance must be drawn by a purchaser or 
seller • or other person, firm, company, or corporation directly connected 
with the importation or exportation of the goods involved in the trans- 
action in which the acceptance originated, or by a "banker." The bill 
must not be renewed after the goods have been surrendered to the pur- 
chaser or consignee, except for such reasonable period as may have been 



G24 THE PRACTICAL WORK OF A BANK 

agreed upon at the time of the opening of the credit as a condition inci- 
dental to the importation or exportation involved, provided that the bill 
must not contain or be subject to any condition whereby the holder 
thereof is obligated to renew the same at maturity. 

(c) A banker's foreign acceptance must bear on its face or be accom- 
panied by evidence in form satisfactory to a Federal Reserve Bank that 
it originated in, or is basted upon, a transaction or transactions involving 
the importation or exportation of goods. Such evidence may consist of a 
certificate on or accompanying the acceptance to the following effect: 

This acceptance is based upon a transaction involving the importation or 
exportation of goods. Reference No. . Name of acceptor . 

(d) A banker's domestic acceptance must be based on a transaction 
covering the shipment of goods, such transaction to be evidenced at the 
time of acceptance by accompanying shipping documents, or must be 
secured by a warehouse receipt covering readily marketable staples and 
issued by a warehouse independent of the borrower; or by the pledge of 
goods actually sold; 

(e) A banker's domestic acceptance must bear on its face or be ac- 
companied by evidence in form satisfactory to the Federal Reserve Bank 
that it is based on a transaction or is secured by a receipt or pledge of 
the character denned in III (d) hereof. Such evidence may consist of a 
certificate in general form similar to that suggested in III (c) hereof; 

(f) Bankers' acceptances, other than those of member banks, whether 
foreign or domestic, shall be eligible only after the acceptors shall have 
agreed in writing to furnish to the Federal Reserve Banks of their re- 
spective districts, upon request, information concerning the nature of the 
transactions against which acceptances (certified or bearing evidence 
under III (c) and (je) hereof) have been made; 

(g) The aggregate of bills, domestic and foreign, of any one drawer, 
drawn on and accepted by any bank or trust company and purchased or 
discounted by a Federal Reserve Bank, shall at no time exceed ten per 
the unimpaired capital and surplus of such bank or trust company, but 
this restriction shall not apply to the purchase or discount of bills drawn 
in good faith against actually existing values ; that is, bills the acceptor 
of which is secured by a lien on or by a transfer of title to the goods to 
be transported, or by other adequate security, such as a warehouse receipt, 
or the pledge of goods actually sold ; 

(h) The aggregate of bills, domestic and foreign, of any one drawer, 
drawn on and accepted by any firm, person, company, or corporation 
(other than a bank or trust company), engaged in the business of dis- 
counting or accepting, and purchased or discounted by a Federal Reserve 
Bank, shall at no time exceed a sum equal to a definite percentage of the 
paid-in capital of such Federal Reserve Bank, such percentage to be fixed 
from time to time by the Federal Resierve Board; but this restriction 
shall not apply to the purchase or discount of bills drawn in good faith 
against actually existing values; that is, bills the acceptor of which is 
secured by a lien on or by a transfer of title to the goods to be trans- 
ported or by other adequate security, such as a warehouse receipt, or the 
pledge of goods actually sold. 

(i) The aggregate of bankers' acceptances, domestic and foreign, 
made by any one firm, person, company, or corporation (other than a 



APPENDIX 625 

bank or trust company) engaged in the business of discounting or accept- 
ing, purchased or discounted by a Federal Reserve Bank, shall at no time 
exceed a sum equal to a definite percentage of thle paid-in capital of such 
Federal Reserve Bank; such percentage to be fixed from time to time by 
the Federal Reserve Board. 

No Federal Reserve Bank shall purchase a domestic or foreign ac- 
ceptance of a "banker" other than a member bank which does not bear 
the indorsement of a member bank, unliess there is furnished a satisfactory 
statement of the financial condition of the acceptor in form to be approved 
by the Federal Reserve Board. 

IV. Policy as to Purchases. — Federal Reserve Banks should bear in 
mind that preference should be given wherever possible to acceptances 
indorsed by a member bank, discounted under section 13, not only because 
of the additional protection that such indorsement affords, but also be- 
cause of the reason that acceptances discounted under section 13 may be 
used as collateral security for the issue of Federal Reserve notes. 

V. So much of Regulation R, series of 1915, as relates to the pur- 
chase in the open market of bankers' acceptances is hereby superseded. 

Circular 20. Series 1915 
December 4, 1915 
General Open-Market Operations 

Thle Federal Reserve Act in section 14, under the head "Open-market 
operations," provides that — 

"Any Federal Reserve Bank may, under the rules and regulations 
prescribed by the Federal Reserve Board, purchase and sell in the open 
market, at home or abroad, either from or to domestic or foreign banks, 
firms, corporations, or individuals, cable transfers, and bankers' accept- 
ances and bills of exchange of the kinds and maturities by this Act made 
eligible for rediscount, with or without the indorsement of a member 
bank." 

The Act also provides that every Federal Reserve Bank shall have 
power — 

"To deal in gold coin and bullion at home or abroad * * *." 

"T buy and sell, at home or abroad, bonds and notes of the United 
States, and bills, notes, revenue bonds, and warrants with a maturity from 
date of purchase of not exceeding six months, issued in anticipation of 
the collection of taxes, or in anticipation of the receipt of assured 
revenue by any State, county, district, political subdivision or munici- 
pality * * *." 

'To purchase from member banks and to sell, with or without its 
indorsement, bills of exchange arising out of commercial transactions, as 
hereinbefore defined." 

Further in the same section permission is given to each Federal Re- 
serve Bank: 

«* * * to buy and sell * * * through (its) correspondents 
or agencies, bills of exchange arising out of actual commercial transac- 
tions which have not more than 90 days to run, and which bear the sig- 
nature of two or more responsible parties." 



626 THE PRACTICAL WORK OF A BANK 

Several of these classes of transactions have already been provided 
for in the circulars and regulations heretofore issued by the Federal 
Reserve Board as follows: 

Regulation F, series of 1915, provides for the purchase of warrants, 
revenue bonds, etc. 

In letters to the various Federal Reserve Banks the conditions have 
been indicated under which bonds and notes of the United States may be 
dealt in. 

In Regulation S, partly superseding Regulation R, series of 1915, 
conditions have been established for the purchase of bankers' accept- 
ances payable in the United States in dollars and growing out of foreign 
trade operations and out of certain domestic transactions. 

There remains still to be dealt with the purchase and sale of "cable 
transfers" and bills of exchange, both domestic and foreign, of the kinds 
and maturities by this Act made eligible for rediscount, and bankers' ac- 
ceptances payable in foreign countries and in foreign currencies. 

The present circular and regulation is intended to cover these items. 
The Board wishes particularly to call attention to the purpose of the 
open-market section of the Federal Reserve Act. It enables the Federal 
Reserve Banks to exert a steadying influence upon prevailing rates of inter- 
est by the use of their purchasing power whenever conditions make such 
influence desirable, and when, owing to the lack of applications for redis- 
counts, they arte unable to influence rates through the latter means. It 
also affords to the Federal Reserve Banks the opportunity of purchasing, 
in the open market, paper with a view to providing for their expenses and 
dividends. The Board is of the opinion that the Federal Reserve Banks 
should, when occasion warrants, stand ready to engage in open-market 
transactions, as buyers or sellers, to the extent that it is necessary to 
carry out the purposes of the Act. 

The Federal Reserve Board does not wish to be understood as encour- 
aging expansion of credits at times and under conditions when there 
should be contraction, but rather as holding the view that the Federal 
Reserve Banks, taking cognizance of the conditions in their respective 
districts, should avail themselves of the powers granted by the act as 
explained in our letter of October 8, 1915, just as they have done in con- 
nection with other open market powers conferred upon them. 

Regulation T. Series 1915 
General Open-Market Operations 

I. Definition. — Open-market operations, as contemplated under the 
Federal Reserve Act, are all those transactions authorized by section 14 
of the Act which involves dealings with persons or institutions — whether 
or not members of the Federal Reserve System — and which do not require 
the indorsement of a member bank. 

II. Operations Provided for in This Regulation. — The present reg- 
ulation deals with operations in cable transfers and foreign and domestic 
bills of exchange and bankers' acceptances payable in foreign countries 
and in foreign currencies. The statutory requirements pertaining thereto 
have already been set forth in the accompanying circular. 

III. Cable Transfers and Foreign Bills of Exchange. — In order to 



APPENDIX 627 

carry on open-market transaction in cable transfers and foreign bills of 
exchange (including foreign bankers' acceptances) — that is, payments to 
be made in, or bills payable in, foreign countries — it will be necessary for 
Federal Reserve Banks to open accounts with correspondents or establish 
agencies in foreign countries. Such bills of exchange and foreign accept- 
ances must comply with the applicable requirements of sections 13 and 14. 
As the law prescribes that these connections are to be established only 
with the consent of the Federal Reserve Board, Federal Reserve Banks 
will be required to communicate with the Federal Reserve Board whenever 
they are ready to enter these foreign fields. 

The Federal Reserve Board realizes that in dealing in foreign ex- 
change the Federal Reserve Banks must necessarily have wide discretion 
in determining the rates at which they will buy or sell. It is not neces- 
sary that the bills shall have been actually accepted at the time on pur- 
chase. The Federal Reserve Board, however, will require that unac- 
cepted "long bills," payable in foreign countries, when purchased, unless 
secured by documents, shall bear one satisfactory indorsement other than 
those of the drawer or acceptor, preferably that of a banker. Federal 
Reserve Banks should exercise due caution in dealing in foreign bills, and 
boards of directors should fix a limit within which the acceptances or bills 
of a single firm may be taken. 

IV. Domestic Bills of Exchange. — A bill of exchange may be defined 
as an unconditional order in writing, addressed by one person to another, 
signed by the person giving it, requiring the person to whom it is ad- 
dressed to pay on demand, or at a fixed or determinable future time, a 
certain sum of money to, or to the order of, a specified person or to bearer. 

A domestic bill of exchange is payable in dollars in the United States. 

The Federal Reserve Board has determined that a bill, in order to be 
eligible for purchase under section 14 by a Federal Reserve Bank, at the 
rate to be established for open-market operations — 

(a) Must be a bill, the proceeds of which have been used, or are to 
be used, in producing, purchasing, carrying, or marketing goods in one or 
more steps of production, manufacture, and distribution; but shall not be 
eligible if its proceeds have been used, or are to be used, for a permanent 
or fixed investment of any kind; for example, land, buildings, machinery, 
etc., or for any investment of a merely speculative character. 

(b) Must have been drawn by a domestic or foreign firm, company, 
corporation, or individual upon a firm, company, corporation, or individual 
in the United States ; but need not bear the indorsement of a member bank, 

(c) Must have been accepted by the drawee prior to the purchase 
by a Federal Reserve Bank unless accompanied and secured by approved 
warehouse receipts, bills of lading, or other such documents covering 
readily marketable goods. 

V. Domestic Bills — Conditions of Purchase. — (a) Before purchas- 
ing domestic bills of exchange, the Federal Reserve Bank must secure 
statements concerning the condition and standing of the drawer of the 
paper, and, if possible, also of the acceptor of the bill, sufficient to satisfy 
the bank as to the nature and quality of the paper to be purchased. 

(d) No Federal Reserve Bank will be permitted to purchase bills of 
any one drawer, or issued upon any one maker, to an amount to exceed 
in the aggregate a percentage of its capital to be fixed from time to time 



628 THE PRACTICAL WORK OF A BANK 

by the Federal Reserve Board, except when secured by approved ware- 
house receipts, bills of lading, or other such documents covering readily 
marketable goods. The aggregate amount drawn on any one acceptor, 
purchased by the Federal Reserve Bank, shall not exceed a reasonable 
percentage of the stated net worth of the parties whose names appear 
upon the paper. 

VI. Rates. — Federal Reserve Banks desiring to engage in open- 
market transactions in domestic bills of exchange shall communicate to 
the Federal Reserve Board the rate they desire to establish, for review 
and determination. 

Circular No. 1. Series 1916 

May 1, 1916 

Check Clearing and Collection 

The Federal Reserve Board is empowered, under section 16 of the 
Federal Reserve Act, to require each Federal Reserve Bank to — 

"Exercise the function of a clearing house for its' member banks." 

After very thorough investigation and many conferences with the Gov- 
ernors of the Federal Reserve Banks on this subject, the Federal Reserve 
Board has determined to exercise its authority and to offer to the member 
banks, and through them to the public, the machinery of the Federal 
Reserve Banks for the operation of a check collection and clearing system 
which it is believed, with the co-operation of member banks, will afford a 
direct, expeditious, and economical system of check collecting and settle- 
ment of balances. 

The date for the inauguration of this system is expected to be June 
15, 1916, or as soon thereafter as the Federal Reserve Banks can com- 
plete preparations for undertaking this work. 

Member banks in each district will in due course receive from their 
Federal Reserve Bank full information as to the terms and all necessary 
details of the arrangement, but for the information of all concerned the 
general terms may be stated to be as follows : 

( 1 ) In order that no inconvenience may be experienced the plan will 
follow as closely as practicable the practice which long experience has 
developed between country banks and their reserve city correspondents. 

Each Federal Reserve Bank will receive at par from its member banks 
checks drawn on all member banks, whether in its own district or other 
districts. It is also proposed to accept at par all checks drawn upon 
non-member banks when such checks can be collected by the Federal 
Reserve Banks at par. 

Each Federal Reserve Bank will receive at par from other Federal 
Reserve Banks checks drawn upon all member banks of its district and 
upon all nonmember banks whose checks can be collected at par by the 
Federal Reserve Bank. 

It is the purpose of the Federal Reserve Board to have the collection 
system developed so as to embrace the collection of all checks on non- 
member banks and private banks, and while this cannot be done imme- 
diately, steps will be taken to afford these facilities as rapidly as pos- 
sible. The Federal Reserve Banks will prepare a par list of all non- 



APPENDIX 629 

member banks, to be revised from time to time, which will be furnished 
to member banks. 

Immediate credit entry upon receipt subject to final payment will be 
made for all such items upon the books of the Federal Reserve Bank at 
full face value, but the proceeds will not be counted as reserve nor be- 
come available to meet checks drawn until actually collected, in accord- 
ance with the best practice now prevailing. 

(2) Checks received by a Federal Reserve Bank on its member banks 
will be forwarded direct to such member banks and will not be charged 
to their accounts until advice of payment has been received or until suf- 
ficient time has elapsed within which to receive advice of payment. 

(3) In the selection of collecting agents for handling checks on non- 
member banks, member banks will be given the preference. 

(4) Under this plan Federal Reserve Banks will receive at par from, 
their member banks checks on all member banks, and on non-member 
banks whose checks can be collected at par by any Federal Reserve 
Bank. Member banks will be required by the Federal Reserve Board to 
provide funds to cover at par all checks received from, or for the account 
of, their Federal Reserve Banks: Provided, however, that a member bank 
may ship lawful money or Federal Reserve notes from its own vaults at 
the expense of its Federal Reserve Bank to cover any deficiency which 
may arise because of and only in the case of inability to provide items to 
offset checks received from or for the account of its Federal Reserve Bank. 

(5) Section 19 of the Federal Reserve Act provides that — 

"The reserve carried by a member bank with a Federal Reserve Bank 
may, under the regulations, and subject to such penalties as may be pre- 
scribed by the Federal Reserve Board, be checked against and withdrawn 
by such member bank for the purpose of meeting existing liabilities : Pro- 
tided, however, That no bank shall at any time make new loans or shall 
pay any dividends unless and until the total reserve required by law is 
fully restored." 

It is manifest that items in process of collection cannot lawfully be 
counted as reserve either by a member bank or by a Federal Reserve Bank. 
Therefore, should a member bank draw against such items the draft would 
be charged against its reserve if such reserve were sufficient in amount 
to pay it; but any resulting impairment of reserves would be subject to 
all the penalties provided by the Act. 

Inasmuch as it is essential that the law in respect to the maintenance 
of required reserves by member banks shall be strictly complied with, the 
Federal Reserve Board will fix a penalty to be imposed upon member 
banks for encroaching upon their reserves. 

Member banks can at all times arrange to keep their reserves intact 
by rediscounting with their Federal Reserve Bank. 

(6) Each Federal Reserve Bank will determine by analysis the 
amounts of uncollected funds appearing on its books to the credit of each 
member bank. Such analysis will show the true status of the reserves 
held by the Federal Reserve Bank for each member bank and will enable 
it to apply the penalty for impairment of reserve. 

A schedule 1 of the time required within which to collect checks will be 
furnished to each member bank to enable it to determine the time at which 



630 THE PRACTICAL WORK OF A BANK 

any item sent to its Federal Reserve Bank will be counted as reserve and 
become available to meet any checks drawn. 

(7) In handling items for member banks, a Federal Reserve Bank 
will act as agent only. It will require that each member bank authorize 
it to send checks for collection to banks on which checks are drawn, and, 
except for negligence, will assume no liability. Any further requirements 
that the Board may deem necessary will be set forth by the Federal 
Reserve Banks in their letters of instruction to their member banks. 

(8) The cost of collecting and clearing checks must necessarily be 
borne by the banks receiving the benefit and in proportion to the service 
rendered. An accurate account will be kept by each reserve bank of the 
cost of performing this service and the Federal Reserve Board will, by 
rule, fix the charge, at so much per item, which may be imposed for the 
service of clearing or collection rendered by the reserve banks, as pro- 
vided in section 16 of the Federal Reserve Act. 

Country-wide Collection of Checks by the Federal Reserve Banks 

(Circular issued by Federal Reserve Bank of New York) 

June 6, 1916 
To the Cashier. 

Sir: On May 1 we sent you a copy of the circular of the Federal 
Reserve Board announcing that the Federal Reserve Banks would estab- 
lish a country-wide par collection system and stating the principles upon 
which it would be operated. 

We now desire to advise* you of the details of this collection system 
which will be inaugurated by the twelve Federal Reserve Banks on July 
15, 1916, and will, on that date, supersede the present intra-district 
system. 

Use of the Collection System Is Voluntary 

No member bank is required to use the collection system, nor are any 
formalities or resolutions required before it may be used. A member bank 
may send items for collection through the Federal Reserve Bank regu- 
larly, occasionally, or not at all ; or may collect them through present cor- 
respondents or in any other manner considered advantageous. 

Items Which Will Be Received 

We will receive from member banks — 

(a) All items drawn on member banks of all districts. 

(b) All items drawn on non-member banks which are members of 
the clearing houses situated in the twelve Federal reserve cities. 

(c) All items drawn on other non-member banks which can be col- 
lected by us at par. 

Lists of the banks on which items will be received will be furnished 
from time to time. As soon as arrangements can be made, drafts and col- 
lection items will also be received for credit after collection. 

When Proceeds of Items Will Be Available 

All items drawn on members of the New York Clearing House Asso- 
ciation received in time for clearing will be immediately credited at par 



APPENDIX 631 

and will thereupon become available as reserve or to pay checks drawn. 
Such items, however, will not be received from members of the New York 
Clearing House Association. 

For all other items immediate credit entry at par will be made, but 
such credit will not be available as reserve or to pay checks drawn until 
the appropriate period indicated on the attached schedule has elapsed. 
These periods are based on the mail time required for items to reach the 
paying bank plus the mail time required for the paying bank to remit to 
the Federal Reserve Bank of its district. By averaging the mail time it 
has been possible to include all points in the country in four divisions, 
namely, one, two( four, and eight days. The schedule is subject to 
change, and for convenience it has been arranged by States rather than 
by Federal reserve districts. 

How Items Will Be Handled 

Items drawn on member banks in this Federal reserve district will be 
forwarded directly to such banks and charged to their accounts after suf- 
ficient time has elapsed for us to have received advice of payment. The 
form of such advice will be attached to our letter and must be signed and 
returned to us on the day of receipt. 

Items drawn on non-member banks in this district will be sent to mem- 
ber banks wherever satisfactory arrangements are made, or may, in our 
discretion, be sent direct for remittance. 

Items drawn on member or non-member banks in any other district 
will be sent to the Federal Reserve Bank of such district for collection 
and settlement. 

Unpaid items not subject to protest must be returned on the day of 
receipt. Protested items must be returned not later than the day after 
receipt. Unpaid items must not be held for any purpose whatsoever ex- 
cept for immediate protest. 

Special Routing Arrangements 

If a member bank has a sufficient volume of items on certain points 
or districts to warrant more direct routing of such items, special arrange- 
ments to meet such conditions will be made on request, if practicable. 

How Member Banks May Maintain Balances 

Member banks may maintain their balances with us (a) by shipping 
to us at our expense properly sorted lawful money or Federal reserve 
notes, (b) by depositing New York exchange, or (c) by the proceeds, 
when available, of out-of-town items deposited for collection. Nonmem- 
ber banks may make remittances in the manner described in (a) and (b) 
in settlement of items sent direct. 

This arrangement has been made in order to comply with the man- 
datory terms of the Federal Reserve Act to the effect that all settlements 
of items, whether by charge against the member bank's account or by re- 
mittance of currency or exchange must be made at full face value without 
deduction, without, however, conflicting with the assumption that items 
are payable only at the counter of the bank on which they are drawn. 



632 THE PRACTICAL WORK OF A BANK 

Restrictions as to Indorsements 

To insure direct routing this bank will not accept any item drawn on 
a bank located outside this district, when such item bears the indorse- 
ment of a bank located outside of this district. The other Federal Re- 
serve Banks will adopt similar rules. 

Service Charge 

The actual cost of conducting the collection department will be as- 
sessed monthly, on a per item basis, upon the member banks depositing 
the items. This service charge will not for the present exceed one and 
one-half cents per item and we hope will be considerably less. No service 
charge will be made for collecting items drawn on members of the New 
York Clearing House. 

Sorting Items 

In order that the service charge may be as small as possible and to 
expedite the forwarding of items, member banks are requested to sort their 
items into the following classes and list each class on a separate sheet: 

(a) Items drawn on members of the New York Clearing House. 

(b) Items drawn on one day points. 

(c) Items drawn on two day points. 

(d) Items drawn on four day points. 

(e) Items drawn on eight day points. 

They are also requested to print on their own checks and the checks 
used by their depositors the* figure "2" (signifying Federal Reserve Dis- 
trict No. 2), preferably in a large skeleton figure in the center of the 
check. 

"Collectible at Par Through the Federal Reserve Bank of New 

York" 

Member banks are entitled to place the words, "Collectible at par 
through the Federal Reserve Bank of New York," on their own checks 
and the checks used by their depositors. Your attention is called to the 
desirability of availing of this privilege. 

Penalty for Impairment of Reserves 

With the inauguration of the collection system the penalty for the im- 
pairment of reserves, provided by the Federal Reserve Act, will be 
imposed. You will be requested to report monthly the average reserve 
required to be kept with the Federal Reserve Bank. Impairment of this 
reserve, if any, will be ascertained by comparing this figure with the aver- 
age actual reserve shown by our books. The penalty has for the present 
been fixed by the Federal Reserve Board at a rate of interest on the aver- 
age impairment equal to two per cent, above the discount rate for ninety- 
day paper, which is now four per cent. 



APPENDIX 633 

Conditions Upon Which Member Banks May Use System 

Every member bank sending items to us after the inauguration of this 
system will be understood to have agreed to the terms and conditions set 
forth in this circular and to have thereby specifically agreed that in re- 
ceiving such items the Federal Reserve Bank of New York will act only 
as the collection agent of the! sending bank, will assume no responsibility 
other than due diligence and care in forwarding such items promptly, and 
will be authorized to send such items for payment direct to the bank on 
which they are drawn or to another agent for collection, at its discretion. 

Co-operation of Member Banks Desired 

The new collection system is based upon the provisions of the Federal 
Reserve Act, and its details, as herein outlined, are the result of a long 
period of carerul study of the problems involved and of experience gained 
in operating the existing intra-district system. The present plan for the 
new system is subject to such future changes as experience gained in 
operating it may show are advisable. It is our desire that it shall be 
conducted in such a manner as to render a valuable service to those who 
use it, and to this end your co-operation is requested and any suggestions 
you may wish to make for its improvement will be welcomed. We will 
be glad to answer any inquiries in regard to the details of the plan, and 
we hope that wherever possible they will be made by personal call at our 
office. 

Schedule Showing When the Proceeds of Items Will Become 

Available 
Immediate Credit 

Members of Clearing Houses in 
New York 

One Day After Receipt 
Members of Clearing Houses in 

Boston 

Philadelphia 

Richmond 

Two Days After Receipt 

Members of Clearing Houses in Banks in 

Cleveland Connecticut New Jersey 

Chicago Delaware *New York 

Atlanta District of Columbia ^Pennsylvania 

Minneapolis Maine Rhode Island 

St. Louis Maryland Vermont 

Kansas City ^Massachusetts ^Virginia 
New Hampshire 



634 



THE PRACTICAL WORK OF A BANK 



Four Days After Receipt 



:>ers of Clearing Houses in 


Banks in 


lias Alabama 


^Minnesota 


w Orleans Arkansas 
Florida 


Mississippi 
*Missouri 


"^Georgia 
^Illinois 


North Carolina 
*Ohio 


Indiana 


South Carolina 


Iowa 


Tennessee 


Kansas 


West Virginia 


Kentucky- 
Michigan 


Wisconsin 



Eight Days After Receipt 



Arizona 
California 
Colorado 
Idaho 
^Louisiana 
Montana 
Nebraska 
Nevada 
New Mexico 



Banks in 



North Dakota 

Oklahoma 

Oregon 

South Dakota 

Texas 

Utah 

Washington 

Wyoming 



*Except members of clearing houses in Fed- 
eral reserve cities referred to in first column. 



INDEX 



Acceptances 20, 22 

Acceptances, Banker's in Federal 
Reserve System, 

602, 610, 613, 617, 618, 620, 622 

Acceptances, Trade 618 

Account, Charge 395 

Account, Influences of 540 

Account, Opening 60 

Account Stated 294 

Accounting, Equation of 260 

Accounting Facts, Presentation 

of 249 

Accounts, Assigned a Menace... 411 

Accounts, Bank 250 

Accounts, Book, as Security 410 

Accounts, Changes in 316 

Accounts, Closed 317 

Accounts, Controlling 285 

Accounts in General Ledger .... 286 

Accounts Receivable 447 

Accounts Receivable as Collateral 237 

Accounts Stated, Rendering 296 

Accounts, Unprofitable 539 

Accrued Assets and Liabilities . . 458 

Acid Test for Coins 144 

Administration of a Bank 39 

Administrative Costs 544 

Agency 129 

Agricultural Paper, Federal Re- 
serve Bank 598 

Aim Definite in Banking Career. 509 
Analysis of Accounts, Methods 

of 551 

Application for Employment .... 275 
Apportionment of Earnings and 

Expenses 547 

Arbitrage 585 

Assets to Liabilities, Ratio 444 

Average Book 295 

Balance, Loanable 543 

Balances, Clearing-House Set- 
tling 157 

Balances, Compensating 323 

Balances Due to and from Banks, 
Comptroller's Instructions to 

Examiners 369, 370 

Balances, Small, Penalizing 542 

Bank and Correspondents 431 

Bank and Depositors' Relation- 
ship 61 

Bank as Credit Machine 12 



Bank Balances, Reconcilement of 360 

Bank Connections (Credit) 457 

Bank, Country vs. City 506 

Bank Credit, Forms of... 16 

Bank, Definition of 30 

Bank, Evolution of 9 

Bank, Function of 33, 58 

Bank Man's Twenty-four Hours. 514 

Bank-Note Credit 17 

Bank Notes 36 

Bank Notes, How Secured 17 

Bank of Discount, Definition of . . 31 

Bank "One-Man" 43 

Bank Profits 537 

Bank Statements by Machine. . .318d 

Banker in Fiction 503 

Banker Must Know Certain 

Things 516 

Banker, Private 28 

Banking House 50, 265 

Banking House, Comptroller's 
Orders to Examiners Concern- 
ing 368 

Banking, Machinery of 77 

Banking Room 51 

Eanking, Two Schools of 504 

Banks, Affiliated, Comptroller's 
Instructions to Examiners Con- 
cerning 369 

Banks Agree in Essentials 253 

Banks Classified 30 

Banks Distinguished 29 

Banks, Surplusage of 40 

Bills, Foreign, Demand for 573 

Bills, How to Strap 70 

Bills of Exchange 626, 627 

Bills of Exchange, Forms of 

574, 575 

Bills of Lading 246 

Bills Payable 273 

Bills Receivable 446 

Block System 81 

Bonds Borrowed 273 

Bonds, Securities, etc. (in State- 
ment) 264 

Book Accounts as Security 410 

Bookkeeping by Machinery 318 

Bookkeeping Force 274 

Books, How Kept, Comptroller's 

Questions Concerning 367 

Books of Record 257 



636 



INDEX 



Borrowers 59 

Borrowers' Liability 223 

Boston Ledger 289 

Boston Ledger, Merits of 291 

Bread and Butter 512 

Building and Loan Association, 

Definition of 32 

Business of Bank 13 

Cables 585 

Call Loans, Payment of 242 

Capital Assets 452 

Capital Stock 267 

Cash 445 

Cash Discounts 464 

Cash, Examination of 357 

Cash, How Stored and Kept 93 

Cash Item— "No Protest" 178 

Cash Items 266 

Cash, Paying Teller's 93 

Cashier, Duties of 45 

Cashier's Checks 271 

Cashing a Check 101 

Certificates of Deposit 271 

Certification 113 

Certification Credit 19 

Certification of Checks 19 

Certified Checks 271 

Characteristics of Banks 30 

Charge Accounts 395 

Charter, Bank 40 

Charter, Preliminaries to Grant- 
ing 41 

Check, Cashing 101 

Check, Cashing a "Stop-Payment" 118 

Check, Dating Ahead 103 

Check, Definition of 322 

Check Frauds, Protection Against 121 

Check, Journey of 325 

Check, Largest Check Ever Paid. 148 

Check, Undated 103 

Checking Function 35 

Checks 266 

Checks, Amount in Process of 

Collection 321 

Checks, Bearer 112 

Checks, Care of 317 

Checks, Certification 113 

Checks, Circulating Currency 320 

Checks, Classified 322 

Checks, Collection of 320, 328, 628 

Checks, Corporation 72 



Checks, Crossed 109 

Checks, Growing Use of 320 

Checks, How They Should be 

Drawn 101 

Checks in Lead Pencil. 112 

Checks, Protection of 116 

Checks, Raised 101 

Checks, Raising 117 

Checks, Safeguarding 120 

City Correspondents 324 

Classification of Banks 30 

Clearing Country Checks 162,630 

Clearing for Non-Members 161 

Clearing-House Activities 160 

Clearing-House Balances, Set- 
tling 157 

Clearing-House, Brief History of 147 
Clearing-House Examinations . . . 363 

Clearing-House Settlements 159 

Clearing-House Terms and In- 
struments 151 

Clearing-House, Varieties of.... 150 

Clearing-Houses 145 

Clearing Process 154 

Clearings, Bank 99, 628 

Clearings, International 25 

Clerk, Chief 279 

Coins, Acid Test 144 

Collateral Loans 211 

Collateral Loans, not Credit 

Transactions 386 

Collateral Loans, Verification of. 357 

Collection Letter 186 

Collections 164 

Collections, Law of 168 

Collections, Machinery of 188 

Collections, Out-of-Town 197 

Collections, Sending Direct to 

Drawee Bank 171 

Commercial Paper 462 

Commercial Paper and Federal 

Reserve Banks 466 

Commercial Paper as Reserves . . 464 
Commercial Paper, Brief of 
Merchants Association of New 

York 471 

Commercial Paper Broker 478 

Commercial Paper, Buying on 

Option '....479 

Commercial Paper (Federal Re- 
serve Board's Ruling) 591 



INDEX 



637 



Commercial Paper, Two-Name. . 469 

Commodity Paper 619 

Common Denominator of Values. 3 

Compensation in Banking 503 

Controlling Accounts 285 

Corporation Checks 72 

Correspondence, How Filed 528 

Cost Accounting 543 

Cost of Handling Items 504 

Cost System Based on Expenses. 558 

Cost, Units of 549 

Costs, Administrative 544 

Costs, Special 545 

Country Banker and City Corre- 
spondent 324 

Country Checks, Clearing 162 

Counterfeits 68 

Coupons 201 

Coupons, How Prepared for De- 
posit 70 

Credit a Lawful Right 377 

Credit — a Fine Piece of Mech- 
anism 375 

Credit — a Science 374 

Credit— A Transfer 375 

Credit, Age of 374 

Credit an Asset 378 

Credit, Bank, Clearing of 24 

Credit, Bank, Limits of 22 

Credit, Bank, Rests Upon Mercan- 
tile Credit 400 

Credit, Certification 19 

Credit, Changing Conditions in.. 408 
Credit, Channels of Mercantile. . 402 
Credit, Commercial, Benefits of. . 400 

Credit, Creation of 14 

Credit Department 430 

Credit, Essentials in Granting. . . 371 

Credit Field, Mercantile 413 

Credit, Field of 372 

Credit, Frauds in 415 

Credit, Individual vs. Mercantile. 393 

Credit Information 432 

Credit Information, How Kept.. 433 
Credit Information in Federal 

Reserve Banks 601 

Credit, Instruments of 409 

Credit Inquiries, Answering 4S2 

Credit in Business 372 

Credit in Economics 371 

Credit in Law 371 

Credit is Ability 379 



Credit is Capital 377 

Credit is Confidence 381 

Credit is Reputation 379 

Credit is Resources 380 

Credit is Willingness 379 

Credit Machine, Operation of . . . . 15 

Credit Man 435 

Credit Man, Comment of on Loan 

Application 460 

Credit Man, Qualities of 487 

Credit Man, Wants to Know 

What 462 

Credit Man's Tools 487 

Credit, Mercantile 399 

Credit, Mercantile, Granting 422 

Credit, Personal 387 

Credit, Personal, Distinguished. . 389 
Credit, Personal, Foundation of 

Credit System 399 

Credit, Personal, Granting of . . . 391 

Credit, Personal, Growth of 396 

Credit, Personal, Losses in 398 

Credit, Personal, Period of 397 

Credit, Psychology of 382 

Credit Ratings, Personal 392 

Credit Risks Classified 434 

Credit Should Facilitate Ex- 
changes 402 

Credit, Sound Elements of 437 

Credit Statement 380 

Credit Statements, Standardized 

Forms , 440 

Credit Terms 408 

Credit, Three C's of 491 

Credit, Use of in International 

Transactions 406 

Credits, Exchange of 18 

Crossed Checks 109 

Dating Ahead 412 

Days Off 283 

Debts, How Settled 1 

Debts, Origin of Foreign 571 

Debts, Settling Without Cash... 569 

Deductive Process 490 

Defects in Present System of 

Checks 321 

Definition of Bank 30 

Demand and Protest Waiver of 
(Federal Reserve Board's Rul- 
ing 602 

Demand and Supply 2 



638 



INDEX 



Deposit Function 

Deposit, Making a 

Deposit, Proving 

Deposit, Specific 

Deposit Ticket, Proving 

Deposit Tickets, Care of 

Deposits 

Deposits are Loans 

Deposits, Bank 

Deposits, Competition for 

Deposits, General 

Deposits, Individual 

Deposits, Individual, Comptrol- 
ler's Instructions to Examiners 
Concerning 

Deposits, Savings 

Deposits, Special 

Deposits, U. S 

Depositors, Accounts with 

Depositors, Bank's Service to ... . 

Depositors, Educating How to 
Draw Checks 

Depreciation 

Directors, Information Concern- 
ing Required by Comptroller . . 

Discount Function 

Discount Market 

Discount Register 

Discount Unearned 

Discounts and Loans Distin- 
guished 

Discounts, Cash 

Discounts, Cash, Cost of 

Discounts Distinguished 

Directors 

Distinction Between Banks 

Dividends 

Dividends, Comptroller's Instruc- 
tions to Examiners Concern- 
ing 

Dividends Unpaid 

Dcmestic Exchange 

Due Date 193, 

Due from Federal Reserve Bank. 

Due from National Banks 

Due from Reserve Agents 

Due from State Banks, etc 

Due from U. S. Treasurer 

Due to Approved Reserve Agents 

Due to National Banks 

Due to State Banks, Etc 



33 
69 
75 
35 

76 

317 

58 

207 

34 

59 

34 

270 



370 

271 

35 

271 

288 
540 



457 

366 
35 
475 
226 
231 

35 

464 
465 
205 

42 
29 

257 



369 
270 
587 
230 
266 
265 
265 
265 
267 
270 



Earning Power of Money 545 

Education a Definite Process 512 

Education, What is 511 

Employees, Information Required 

by Comptroller 366 

Employees, Old 167 

Employment, Application for 275 

Endorsements 183 

Endorsements, Corporation 74 

Errors, Psychology of 353 

Examination, How to Make 355 

Examination, What Constitutes a 

Complete 351 

Examinations, Bank 349 

Examinations by Directors 351 

Examinations, Classes of 350 

Examinations, Clearing-House . . . 363 
Examinations, Details of Required 

by Comptroller of Currency. . . 366 

Examine, Right to 349 

Examiner, what he should know. 352 

Exchange, Basis of 576 

P'xchange Charges 330, 544 

Exchange, Domestic 587 

Exchange, Foreign and Domestic. 569 

Exchange, how quoted 575 

Exchange Rates, Causes Affecting 576 

Exchanges, Balance of 319 

Exchanges for Clearing-House . . . 266 

Exchanges, Verification of 357 

Executors and Trustees, National 

Banks as 605 

Expense Account, Analyzing. . . . 559 

Expenses 315 

Experience 511 

Exports, how financed 580 

Failures, Causes of 423 

Farm Lands, Loans on in Federal 

Reserve System 607 

Filing System 530 

Fixtures 453 

Force, The Bank 274 

Foreign Exchange 569 

Foreign Exchange, Factors in. . . 581 

Foreign Exchange, Profits in 584 

Forgery 101 

Fractional Currency 266 

Functions of a Bank 33 

Furniture and Fixtures 265 

General Ledger 285 

Germany, Development of 27 



INDEX 



639 



"Good Delivery" 219 

Good Will 458 

Government Money and Securi- 
ties, Verification of 360 

Identification 105 

Imports, How Financed 577 

Improvement, Self. 508 

Individual Ledger 287 

Indorsements 72 

Indorsements, Third Party 74 

"Ink Spots on the Ledger" 46 

Interest 239, 544 

Interest Statement 238, 240 

Inventory 450 

Item, Cost of Handling an 564 

Journal Entries 287 

Journal, The 258 

Law of Collections 168 

Ledger, Boston 289, 290, 292 

Ledger, General 285 

Ledger, Individual 287 

Ledger, Opening 300 

Ledger Posting by Machine. 318a, 318b 

Ledger Sheets, Safeguarding 318 f 

Legal Tender 144 

Letters, Improved Methods of 

Folding 525 

Liabilities 454 

Liabilities to Assets, Ratio 444 

Liabilities to Capital 458 

Liabilities, Verification of 361 

Liability, Borrowers' 223 

Liability Register 227 

Listed and Unlisted Securities . . . 213 

Loan, Applying for : . . 210 

Loan, Bookkeeping of 221 

Loan, Good, Essentials of 436 

Loan, Passing of 459 

Loaning for Bank's Correspond- 
ents 242 

Loans and Credit 205 

Loans and Discounts 262 

Loans and Discounts Distin- 
guished 35, 205 

Loans and Discounts, Informa- 
tion About, Required by 

Comptroller 367 

Loans, Collateral 211 

Loans, Liquid 909 



Loans on Farm Lands (Federal 

System) 607 

Loans, Time 220 

Losses, Expected 436 

Machinery, Bookkeeping by 318 

Machinery in Credit Statement.. 453 
Mail, How Handled in Large 

Bank 519, 520 

Mail, Morning 518 

Mail, Outgoing 523 

Margin of Security, The T. . . 215 

Market Operations Open 625,626 

Maturity Record 222 

Medium of Exchange 4 

Men, Available #75 

Men All Not Honest 383 

Men, Handling 281 

Men, Two Better Than One 385 

Mental Processes in Granting 

Credit 382 

Merchandise 449 

Messenger 164 

Messengers, Record of Collec- 
tions 168 

Methods, Definite of Education.. 510 

Mistakes, Teller's 126 

Money, Earning Power of 545 

Money, Good and Bad 67 

Money, How Put Up 70 

Money, Paper 8 

Money, Qualities of 6 

Money, Settling Debts Without.. 569 

Money Teller 129 

Money, What is? 5 

Mortgage Company, Definition of 32 

Net Worth 457 

New York, the Deposit Center.. 58 

Non-members, Clearings for 161 

Note Bank Issues 36 

Note, Promissory 173 

Note Teller 194 

Notes, Circulating 269 

Notes, National Bank 266 

Notes, State Bank 269 

Notification 193 

Numerical Transit System 334 

Officers, Information About, Re- 
quired by Comptroller 366 

Operations, Open Market 625, 626 

Organization, Integrity of 459 



640 



INDEX 



Organization of a Bank 38 

Overdrafts 263 

Overdrafts, Automatic Detection 

of 318c 

Overdrafts, Comptroller's Regu- 
lations Concerning 368 

Pass Books 62 

Pass Books, Balancing..... 312 

Past Performances . . 385 

Paper Money 8 

Paper, Two Name 469 

Paying Teller, Duties of . . . .. 91 

Paying Teller, Proverbs of . . 142 

Paying Teller, Qualifications of. 89 

Paying Teller's Cash 93 

Paying Teller's Files 127 

Payment, Stop 109 

Payroll, Bank's .125 

Pensions 283 

Personal Loan Company 32 

Petty Cash 316 

"Philip— An Institution". 56, 57 

Plant to Capital 456 

Points, Pivotal in Banker's Life. 507 

Premium on Bonds 264 

President 44 

Profits, Bank 425 

Profitable Accounts 539 

Proof, Skeleton 293 

Proof, Teller's 78 

Property and Property Rights . . 386 
Proverbs of a Paying Teller . . 142 

Qualities of Money 6 

Ratio of Assets to Liabilities... 444 

Real Estate 265 

Receiving Teller 58 

Receiving Teller, Duties and 

Qualifications of 64, 66 

Receiving vs. Paying Teller 88, 89 

Receivables 447 

Records, Bank Purpose of 284 

Records, Corporate 253 

Records, Paying Teller's 127 

Recruit, new 277 

Redemption Fund With U. S. 

Treasurer 266 

Rediscounts 273 

Rediscounts, Comptroller's In- 
structions to Examiners Con- 
cerning 370 

References in Personal Credit... 391 



Reserve, Comptroller's Orders to 
Examiners Concerning ....... 368 

Reserve, How Figured 134 

Reserve (Money) ... 266 

Retailer, The 429 

Retail Selling, Cost of 414 

Retail Store, Development of 424 

Risk, Business, in Credit 438 

Risk, Moral, in Credit 437 

Risk, Property, in Credit 438 

Rubber Stamps 280 

Safe Deposit Company (Defini- 
tion) 32 

Satisfaction, Self 509 

Savings Bank Books (Collection 

of) 202 

Savings Bank, Definition of..... 31 

Savings Deposits 271 

Savings Deposits, Federal Re- 
serve Board's Ruling 608 

Securities, Comptroller's Require- 
ments, Concerning 368 

Signatures, Classes of on File... 127 

Stamps Used, Record of 527 

Standards, Credit 430 

Statement, Analysis of 261 

Statement, Borrower's Estimate 

of Himself 439 

Statement, Credit, Essentials in.. 492 

Statement, How to Analyze 443 

Statement, Must be Recent 441 

Statement of Condition (ana- 
lyzed) 261 

Statement, Purpose of 261 

Statement, Reciprocal in Value. . 442 
Statement, System (in lieu of 

pass book) 296 

Stptements, Analysis of Actual.. 486 
Statements, Borrowers' Credit 
(Federal Reserve Board's Rul- 
ing) 593, 599 

Statements, Comparison of 384 

Statements, False 442 

Statements, Mercantile 419 

Statements, Monthly 318f, 318g 

Stationery and Supplies 313 

Stop Payment 109 

Stock, Capital 267 

Stock, Capital, Comptroller's In- 
structions to Examiners Con- 
cerning 369 

Stock, Certificate, Book 255 



INDEX 



641 



Stock Subscriptions 256 

Stock, Transfer of 256 

Stockholder's Liability 33 

Subsidiary Coin 266 

Substitutions 229 

Supplies ••••••• 313 

Surplus 268 

Surplus, Comptroller's Instruc- 
tions to Examiners Concerning 369 

"Tallies" 146 

Taxes, Reserved for 273 

Teller, Day With , 84 

Teller, Money 129 

Teller, Paying, Records and Files 125 

Teller's Mistakes • .. 124 

Teller's Records and Proof 78 

Teller's Work, Savings Bank and 

Bank of Discount Contrasted.. 53 

Three C's of Credit 491 

Tender, Legal 144 

Test for Coins 144 

Ticket, Deposit, Depositor Should 

Make 70 

Time Deposits, Federal Reserve 

Board's Ruling 608 

Training Essential to Success... 506 

Transit Letter 196 

Transit Letter, Evolution of 339 

INDEX TO FORMS 

Account, Stated 294 

Accounts Closed 251, 317 

Accounts, New, Record of for 

Credit Office 297 

Accounts Opened 251 

Adding Machine 278, 302, 309 

Addressing Machine 299 

Advertisements, Soliciting the 

Discount of Accounts 411 

Analysis of Account 541 

Analysis Sheet for Analyzing 

Accounts 546, 550 

Application for Employment 276 

Average Balance Card 225, 538 

Bank Bookkeeping Machine 311 

Banking Room (floor plan)... 52, 54 

Bill of Exchange. 570 

Bills Purchased, List of for 

Credit Department 404 

Bookkeeping Machine 311 

Boston Ledger .290, 292 



Transacting Business Without 

Cash 405 

Transfers, Cable 626 

Transit Department 326 

Transit Department in Opera- 
tion 339 

Trial Balance 308 

Trust, Basis of Credit System. . . 13 
Trust Company, Definition of . . . 32 
Trustees and Executors, National 

Banks as 605 

Turnover, How to Figure 420 

Two-Name Paper 469. 

Undivided profits 269 

Units of Cost 549 

Unit System 136 

IT. S. Bonds on Hand 264 

IT. S. Bonds to Secure Circulation 264 
U. S. Bonds to Secure Deposits.. 264 
Unsecured Loans, Verification of 359 

Vacations 283 

Vaults 55 

Vice-President 44 

Vouchers, Care of 317 

Weekly Report, Clearing-House. 163 

Wholesaler, The 429 

Words and Figures, Differences 
in, in Checks 103 

AND ILLUSTRATIONS 

Cash 236 

Cash Book, Teller's 80 

Cash Record 92 

Cash Sheet, Teller's 78 

Certificate of Deposit 270 

Certificate of Deposit Register. . 272 

Check Cancelling Machine 318 

Check Registers 348a, 348b 

Check, With Instruction Slip 172 

Clearing-House Balance Sheet. . 158 

Clearing-House Debit Ticket 155 

Clearing-House Delivery Clerk's 

Statement 156 

Clearing-House Settling Clerk's 

Statement 156 

Collateral Note 218 

Collateral Note, Form of 219 

Collateral Time Note 217 

Collection Letter 185, 192, 200 

Collection Letter (city) 189 

Collection Letter (own paper) . . 186 



642 



INDEX 



Collection Register 204 

Collection Tracer 194 

Collections, Foreign Exchange... 586 

Correspondence File 

530, 531, 532, 533, 534 
Correspondence Transfer Case... 532 

Credit File 489, 534, 535, 536 

Credit Inquiry, Memo of Answer 

to 401 

Credit Statement 486 

Credit Statement, Corporation, 

378, 440c 

Credit Statement, Farmer 440d 

Credit Statement, Firm 376,440b 

Credit Statement, Individuals.373, 440a 
Credit Statement, Live Stock 

Dealer 440d 

Credit Statement, Real Estate. . . 484 
Credit Statement, Standard Form 

388, 390 
Credit, Questionaire Relative to 

Business 394 

Debit Ticket, Clearing-House 155 

Discount Register 222, 223 

Draft, Demand 166 

Draft, Register 588 

Draft, Sight — Returned, Reason 

Checked 180 

Draft, Time 166 

Draft, Time— "No protest" 169 

Draft With Bill of Lading 183 

Interest Accrued 233 

Interest Accrued Receivable. .232, 233 

Journal 259 

Journal, General Balance 259 

Kansas City Clearing-House 329 

Ledger Sheet (Machine) 318a 

Letter of Credit 572 

Letter of Credit, Advice 574 

Loan Department Proof 224 

Loan Envelope 216 

Loan Record Cards 212, 214 

Liability Book 225 

Mail Sheet 527 



Mail Teller, Proof Sheet 520 

Monthly Statement 318e 

New Account Record Card 65 

Note Returned Unpaid, Reason 

Checked 176 

Notice of Draft Left for Collec- 
tion 169 

Notice of Maturing Loan 230 

Offering Sheet for Loans 210 

Overdrafts, Report of 263 

Pay Roll Requisition 90 

Postage, Record of 527, 528 

Postage Used, Statement of.. 527, 528 

Profit and Loss Sheet 236 

Proof Sheet, Credit Clerk 281 

Recall Notice on Note 190 

Sealing and Stamping Machine.. 526 

Shannon File 533 

Slip Return Attached to Collec- 
tions 180 

Stamp Affixing Machine 524, 526 

Stamps, Record of Used 527 

Statement to Depositors . 293, 297, 298 
Statement to Depositors (adding 

machine form) 303, 318, 318e 

Statements, Comparison of Credit 

416, 417 

Stop Payment Notice Ill 

Substitution Sheet 228 

Teller's Balance 132 

Teller's Cash Book 80 

Teller's Clearing Sheet 82 

Terms on Which Deposits Are 

Received 63 

Time Draft 165 

Tracer for Collections 194 

Transit Letter 336 

Transit Letter, Carbon Process . . 344 

Transit Machine 334 

Trial Balance 308 

Trust Receipt 578 

Trust Receipt, Documents for 

Warehousing 582 

Typewriter, Transit 340 

Verification of Collateral Loan . . 244 



INDEX TO PROPER NAMES 



Adder Machine Co.. 278, 302, 303, 309 

Addressograph Co 299 

Agger, Eugene E 402 

Alcorn, Edgar G 310 

Ailing, N. D iv., 75, 279, 295 



American Bankers* Association. . 

335, 388, 390 
American Exchange National Bank 173 
American Institute of Banking 
(Preface) 188, 506 



INDEX 



64fc 



Aristotle 4 

Atlanta Clearing-House 329 

Bank of England 9 

Bank of France 9 

Bank of New York 37, 148 

Bank of the Manhattan Co 29 

Bank of Woodland, Woodland, 

Cal. 94 

Barrett, A. M 154 

Barrett, A. R 528 

Bath National Bank, Bath, N. Y. 98 

Bavier, G. M iv. 

Billman, Henry iv., 129 

Boston Clearing-House 147, 328 

Buckley, W. A 557 

Burns, William J 116 

Brady, John Edson 171 

Burroughs Adding Machine Co . . 

309, 318c, 318d, 318e, 318g, 334, 336, 

346. 

Cannon, James G 325 

Cary, H. M 465 

Central National Bank, St. Louis 104 

Chapman, Joseph, Jr 515 

Chase National Bank, New York 518 
Chemical National Bank, New 

York 29 

Citizens Bank of Buffalo 

373, 376, 378 

Cleveland National Bank 336 

Continental Bank & Trust Co., 

Shrevesport, La 217, 230 

Continental & Commercial Na- 
tional Bank, Chicago 335 

Corn Exchange National Bank, 

Chicago 334, 339 

Cowlitz County Bank, Kaloma, 

Wash. 178 

Croker-Woolworth National Bank 94 
Cummins Co., B. F 318 

Deposit National Bank, Dubois, 
Pa 165 

Elliott-Fisher Co 312, 346 

Ensell, E. H iv., 547 

Ernst & Ernst 421, 426, 450 

Escher, Franklin 571, 583, 585 

Eyler, A. E 331 

Farmers Loan & Trust Co 29 

Federal Title & Trust Co., Beaver 
Falls, Pa 227 



First National Bank, Boston 

56, 57,506 
First National Bank, Bristol, R. I. 106 

First National Bank, Denver 138 

First National Bank, Los An- 
geles 13& 

First National Bank, Nashville, 

Tenn 17* 

First National Bank, Pasadena, 

Cal 

First National Bank, Philadelphia 412' 
First National Bank, Springfield, 

Mo 115 

Fourth National Bank, New York 41fr 
Fourth Street National Bank, 

Philadelphia 55T 

Fowler, C. W 83 

Fuller, Horace F 69, 83 

Girard National Bank 173 

Glenn, Marion R iv. 

Guaranty Trust Co., Preface, .iv., 63,. 
126, 135, 155, 156, 158, 169, 180, 194^ 
228, 244, 297, 384, 572, 574, 578, 586 

Hagerty "Mercantile Credit" 399 

Holden, Henry S., Veneer Co., 

Grand Rapids, Mich 9fr 

Hyne, William M iv. 

Inness, A. Mitchell 146- 

international Paper Co 467 

Irving National Bank 

iv., 75, 90, 108, 138, 186, 189, 
190, 192, 196, 200, 238, 240, 276, 298 

Jefferson, Howard M 231 

Jess, Stoddard 137, 138 

Jones, E. W 133 

Kansas City Clearing-House 162 

Kuhn, Loeb & Co 148, 149* 

Lansing State Savings Bank, 

Lansing, Mich 

Lersner, V. A iv. 

Lester, J. G 329- 

London Clearing-House 147 

MacAvoy, William C 243 

MacDonnell, J. S 142^ 

Manufacturers National Bank, 

Philadelphia, Pa 166, 202' 

Marine National Bank, Buffalo. 52,. 54 
Market & Fulton National Bank, 

New York 194, 241 



$u 



INDEX 



Martin, William McChesney 113 

McWilliam, E. G iv. 

Merchants' Association of New 

York .471 

Merchants-Manufacturers Nation- 
al Bank, Baltimore . 550 

Merchants National Bank, Provi- 
dence, R. I .....:....;.... 106 

Milliken, William H iv. 

Moore, A. K 520 

Morse on Banking. 123 

Moxey, E. P 351, 353, 354 

National Automatic Machine Co . .- . • ; 

524, 526 

National Bank of Commerce, 
New York .148, 149 

National Bank of Republic, Chi- 
cago . . 342 

National Bank of Schwenkville, 
Pa. 202 

National City Bank, New York. ; 

14, 29 t 153, 175, 334 

National Exchange Bank, Roan- 
oke, Va. 78, 82, 111, 287, 293 

National Paper Co., St. Louis... 104 

National Park Bank, New York. 

183, 243 

National Shawmut Bank, Boston 133 

Newfang, Oscar 445, 451, 456, 459 

New York Clearing-House 

145, 148, 162, 183, 184 

New York State Bankers' Asso- 
ciation .388, 390 

New York Stock Exchange 242 

New York Times 

411, 413, 421, 427, 450 

North Side Bank, Brooklyn 129 

Northwestern National Bank, 
Minneapolis, Minn 515 

Nichols, Thomas B 247 

Parsons, D. F., Burr Oak, Mich.. 181 

Pennsylvania Railroad 149 

Pillsbury Flour Co 467 

Poehler, Theo, Mercantile Co 466 

Produce Exchange Bank, New 
York 247 

Read, William A. & Co 148 

Reichsbank, The 9 



Reihl, Charles W 365 

Remington Typewriter Co 346 

Rosendale, William M.. . . iv., 241 

Ruggles, Charles A. 328 

Seaboard National Bank, New 

York ..; . . . . ............. .,.; 183 

Second National Bank, Boston, 

69, 83, 248 

Schoeneck, Edward E 339 

Shepherd, Owen 467 

Skinner, E. M , ... .421, 425 

Snyder, F. B.......412, 452, 455, 483 

Spielberger, Louis 220 

State Bank of Michigan, Grand 

c Rapids '. 96 

Stoll, George M iv. 

Stone, Herbert E 248 

Talbert, J. H 14 

Telling, Oscar 43 

Third National Bank, Detroit... 102 

Thralls, Jerome 329 

Todd & Co., G. W. Co 

96 9 98, 100, 102, 104, 116 
Trust & Deposit Co. of Onon- 
daga, Syracuse, N. Y 83 

Union National Bank, Clarks- 
burg, W. Va 100 

Union National Bank, Pittsburgh 331 
Union Bank & Trust Co., Jack- 
son, Tenn , 185, 225, 344 

United Cigar Stores 422 

U. S. National Bank, Omaha, 
Neb 303 

Wahl Adding Machine Co., Chi- 
cago 340 

Webster, Daniel 37 

Weitzel, Law of Bank Deposits. . 35 

Westinghouse Co 467 

White, Horace (Money and Bank- 
ing) 1, 2, 5, 7, 8, 14, 31, 36, 37 

Wilson Bros 421, 425 

Williamsburgh Savings Bank iv. 

Yawman & Erbe Manufacturing 

Co 536 

Youngman, E. H iv. 



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